The IRS released an Information Letter on March 29, 2013 stating that there is no prohibition against a 501(c)(3) utilizing an internet fundraising platform to raise funds. Which is good because that’s been around for a few years.
They did include some good suggestions.
- Be sure to consider any state laws and regulations that may apply.
- Be sure to make it clear on the website the status as a 501(c)(3).
- Providing something of value to donors may violate the rules against private benefit or inurement, so be sure to disclose the value and a statement that it is de minimus (unless it isn’t).
- Be sure to disclose whether or not, and how much, of a donation is tax deductible for the donor.
Read the letter here.
Just in time for Valentine’s Day, the House of Representatives Ways and Means Committee held a hearing featuring over 40 witnesses testifying in favor of protecting the charitable contribution tax deduction.
Large nonprofits were in attendance, including: Council on Foundations, Meals on Wheels, Jewish Federations of America, and the United Way, among others. Participants in the hearing were pushing the committee to not institute a cap on charitable deductions and discussed other topics including valuation of noncash donations and mileage reimbursement incentives for volunteers.
United Way Worldwide President & CEO Brian Gallagher testified, “Don’t be fooled into thinking that limiting the deduction will only impact wealthy taxpayers. If the deduction is reduced, expect donors to withhold the difference necesary to cover the tax from their donations.” Estimates of the impact of a 28% cap to United Way’s donations projected a reduction in donations of more than $100 million annually.
Read more about the seven hour hearing here.
The documentation requirements taxpayers must maintain in order to take a charitable contribution deduction on their tax return have been in place for almost 20 years. They are worth repeating however, as two recent tax court cases have upheld the necessity of following these rules and denied contribution deductions to taxpayers who did not have the necessary documentation.
As a review a donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the recipient organization. Although it is a donors responsibility to obtain a written acknowledgement, charities should be very mindful of these rules because certainly donor relations are at stake if something goes wrong. IRS publication 1771 outlines these requirements.
In a 2012 case, David and Veronda Durden were denied a tax deduction for contributions made to their church because the original acknowledgement letter received from the Church did not clearly stipulate that no goods or services were provided to the donors in exchange for their donation ( TC Memo 2012-140). To correct this problem, the Church issued a second acknowledgement letter with the required statement but it was rejected by the Court because it was not considered to be contemporaneous.
To be considered contemporaneous, the documentation must be obtained on or before the earlier of:
- The date the taxpayer files the original return for the taxable year, or
- The due date ( including extensions ) for filing the original return for the year.
There are rules outlining necessary steps if a non-cash donation of over $5000 is claimed for what is required to take a deduction for non-cash property (real estate, furniture, computer equipment, clothing etc.). The donor is required to file a Form 8283 with their standard return and it must include the signature of a “qualified appraiser” as to the value assigned to the donated property.
The tax court case of Joseph and Shirley Mohamed (TC memo 2012-152) also ruled against the taxpayers (who had taken a deduction of millions of dollars for donated real estate) because they did not properly comply with the rules regarding Form 8283 and did not obtain a qualified appraisal. This case resulted in a really draconian result for the taxpayer who had clearly donated substantially valuable property to their presumably valid charitable remainder trust, yet were denied the deduction due to improper reporting of the gift as far as completing the requirements of IRS Form 8283.
In both of these cases, the Tax Court has sent a strong message that the substantiation rules DO MATTER and failure to follow them closely will result in the loss of a contribution deduction.
At year end the charitable donations accelerate as individuals do year end planning and decide to donate more to get those tax deductions. So you want to be sure your donors are going to be able to deduct their donations and that your organization is in full compliance when it comes to the IRS rules. Remember that any contribution of more than $250 must be responded to with a written acknowledgment – donors must have the written acknowledgment for their tax records. Noncash property worth more than $5,000 will usually require an appraisal done by the donor in order to be deducted. And if you - the nonprofit – provided goods or services in exchange for donations of $250 or more, the donor must to be notified of the amount of goods or services received, and the remaining amount that represents the deductible portion.
See more here: http://www.irs.gov/pub/irs-pdf/p1771.pdf
How important are a few words? Ask the taxpayer whose charitable contribution deduction was denied by the IRS. The IRS requires organization to contemporaneously document whether any goods or services were provided in consideration for a contribution. Now is a good time to read through your organization’s gift acknowledgement to see that required wording is included. Aronson LLC is available to assist as needed. For more details of the IRS court case see ECFA.
The Tax Court recently denied a taxpayer’s large charitable contribution deduction for donated real estate valued at $18.5 Million. The Court denied the deduction because the taxpayer did not have the proper substantiation of the value under the tax code rules. The Court acknowledged the taxpayer did make the donation and also stated that the property’s value was probably greater than the amount the taxpayer was claiming. (TC Memo 2012-152)
In order to take charitable deductions of more than $5,000 worth of noncash property, there are very strict substantiation rules that must be followed. Among the rules is the requirement for the taxpayer to obtain a qualified appraisal for any noncash single item or grouping of items donated and valued by the taxpayer at over $5,000.
If you are a nonprofit 501(c)(3) receiving noncash donations, or a taxpayer who wishes to donate such items and take the charitable deduction applicable, we strongly advise you talk to your nonprofit tax specialist early in the process to make sure the taxpayer meets all the substantiation requirements so the desired tax deduction can be taken.
An organization seeking exemption under section 501(c)(3) of the Code is required to apply for recognition of exemption on Form 1023. However, churches, their integrated auxiliaries, and conventions or associations of churches seeking section 501(c)(3) status are exempted from this application requirement. Churches that meet the requirements of section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. However, it is noted that some Churches choose to obtain the tax-exempt status from the IRS to assure their members that any contributions made are indeed tax-exempt. In addition, this exemption is only for types of organizations listed above. Religious organizations, that wish to be tax-exempt and whose gross receipts exceed $5,000, must still apply to the IRS for the coveted status.
It is important to note what rules all 501(c)(3)’s (including churches ) must abide by to maintain their status:
- Their net earnings may not be given to a private individual or shareholder.
- Their substantial benefit cannot be to private interests.
- The majority of their time cannot be devoted to attempting to influence legislations.
- They cannot participate or intervene in any political campaign.
- Their purpose and activities must be legal and not violate fundamental public policy.
In conclusion, if you are unsure if you need to obtain an IRS determination letter, err on the side of caution and get one!
#nonprofit #determinationletter #taxexempt #irsfiling
Recording restricted contributions can be a confusing topic, so it shows up often as a management letter comment. Depending on the extent of the matter this could range from a significant deficiency to a material weakness. Below are some suggestions on how identify and record restricted contributions and avoid getting a management letter comment from your auditors.
First, what is a restricted contribution and what isn’t?
- When a pledge is received and will be paid in future year(s), it is temporarily restricted for time. If it is for a specific program it may also be purpose restricted. These would be recognized as temporarily restricted revenue in the year pledged.
- A contribution received in the current year that is intended for specific purposes is temporarily restricted. If it is for core or general operations, it is unrestricted.
- Payments received relating to future memberships or conference revenue are not temporarily restricted as they are not contributions. These would be deferred revenue.
- Payments received for contract services not yet rendered would be deferred revenue, not temporarily restricted.
- Advances on exchange transactions when the expenses have not yet been incurred, are deferred revenues.
An important concept to note is that you can’t defer a receivable and vice versa. Deferring is a way of not recognizing the revenue yet. You defer things received but not yet earned. A receivable is revenue you’ve earned and rightly recognized, but not yet received. A temporary restriction is to identify funds received and recognized as revenue, but not yet expended in accordance with donor intent. It’s easy to forget all of that in the face of a confusing revenue event. Continue reading »
Canadian charity, Escarpment Biosphere Foundation, has had its charity status revoked by the Canadian government based on claims that the organization has functioned as a tax shelter for companies in Canada, Europe, and the U.S.
The organization claims it never violated tax law but has closed its doors due to the expense of defending itself against the accusation over the last four years. The group valued the medicine it distributed as worth $300 million but obtained no independent verification of the value. The medicine was never in the possession of the foundation, instead being funneled through other Canadian charities to be distributed.
The foundation’s website states that the medicines distributed saved over 90,000 lives and treated more than 90 million people. Therein lie the true victims. Whether or not the group intentionally functioned as a tax shelter or not, the over-valuing of its donated medicine became its downfall. The Canadian tax agency put it succinctly, “The organization’s original purposes, those for the protection and preservation of the environment, have been modified and sidetracked to promote a tax-shelter gifting arrangement.” As will happen in the nonprofit sector, the next group will step in to fill the need. One hopes that they learn from others’ mistakes and will not be similarly sidetracked.
Read more about the issue here.
The Journal of Accountancy has an article about the changes to the 2011 Form 990. Changes noted include:
- Organizations must complete Schedule F, Statement of Activities Outside the U.S., if it had foreign investments during the year valued at $100K or more. This means any offshore investments and hedge funds whereas Sch F had previously been specific to revenue of $10K or more from foreign activities.
- Part X, Balance Sheet must now show distributive share of assets in any joint ventures including partnerships that would have been reported on a Schedule K-1.
- Distributive share of investment income, royalties and rental income from joint ventures should be reported on specific lines of Part VIII, Statement of Revenue.
- The definition of “grants and other assistance” has been adjusted to exclude certain payments by voluntary employees’ beneficiary associations.
- A donor’s phone bill for a text message donation now meets the requirement for written record if it shows the donee organization’s name, and the date and amount of contribution.
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