Background. The rules for substantiating charitable contributions of $250 or more that took effect in 1994 continue to cause confusion. The IRS issued proposed regulations last year that address some of the questions that have arisen. The public was invited to comment on these regulations, and the IRS recently released final regulations based in part on these comments. There are a few provisions in the final regulations that will be of interest to church treasurers, and they are summarized and illustrated in this article.
Key point. Familiarity with the final regulations will help church treasurers properly credit and receipt charitable contributions.
Intent to make a charitable contribution. For many years, the IRS has ruled that persons who receive goods or services in exchange for a payment to a charity are eligible for a charitable contribution deduction only with respect to the amount by which their payment that exceeds the fair rental value of the goods or services they received. The final regulations add an additional condition—donors may not claim a charitable contribution in such a case unless they intended to make a payment in excess of the fair market value of the goods or services.
Example. A church sells tickets to a missions banquet. The cost of each ticket is $100, though the fair market value of the meal is only $20. Persons who purchase tickets are eligible to claim a charitable contribution deduction in the amount of $80—if they intended to make a payment in excess of the amount of the dinner.
How will church treasurers know when donors intend to make a payment in excess of goods or services received in exchange? The final regulations aren’t of much help here. They simply state that “the facts and circumstances” of each case must be considered.
Key point. One rule of thumb may help—the greater the amount by which a payment exceeds the market value of goods or services received in exchange, the more likely the donor intended to make a charitable contribution. In the previous example, it is clear that donors intend to make a contribution since the ticket price ($100) obviously exceeds the value of the dinner. This is a good reason to set ticket prices at a level obviously higher than the value of a meal received at an appreciation banquet.
Key point. Most persons who buy tickets to missions banquets, or who receive a free dinner in appreciation for a contribution, do not make their contribution in order to get a free meal. They would give the same amount whether or not the meal was received. As a result, an argument could be made that charitable contribution deductions should not be reduced by the value of appreciation meals. While there is much merit to this logic, the IRS has rejected it.
Refusal of benefits. What if a member purchases a $100 ticket to a church’s missions banquet (in the above example), but has no intention of attending the banquet? Is the member entitled to a charitable contribution deduction of $100, or $80? In other words, must a charitable contribution be reduced by the amount of goods or services that a donor refuses to accept?
The IRS addressed this issue when it released the final regulations, noting that “a taxpayer who has properly rejected a benefit offered by a charitable organization may claim a deduction in the full amount of the payment to the charitable organization.” How does a donor reject a benefit? The IRS suggested that charities create a form containing a “check-off box” that donors can check at the time they make a contribution if they want to refuse a benefit.
Key point. The IRS distinguishes goods or services that were made available to a donor but not used, from those that were properly rejected. To illustrate, donors who purchase a ticket to a missions banquet for $100 must reduce their contribution by the value of the meal ($20 in the above example) even if they decide not to attend the banquet. However, if at the time a donor purchases a ticket he indicates unequivocally and in writing that he will not be attending the banquet, then the church treasurer can receipt the donor for the full value of the ticket ($100). And, the IRS has noted that in such a case the receipt issued by the church “need not reflect the value of the rejected benefit.”
Timely receipts. The new rules for substantiating charitable contributions that took effect in 1994 deny a deduction for individual contributions of $250 or more unless the donor receives a receipt from the charity that complies with several requirements. One of those requirements is that the donor must receive a “contemporaneous” or timely receipt from the charity. This means that the receipt acknowledging the contribution must be received by the donor on or before the earlier of the following two dates: (1) the date the donor files a tax return claiming a deduction for the contribution, or (2) the due date (including extensions) for filing the return.
Will the IRS actually deny a charitable contribution deduction to a donor simply because she did not receive a timely receipt from the charity? To illustrate, assume that a church issues receipts to donors in February of 1997 reflecting their contributions for 1996. Kathy made weekly contributions of $25 to the church, but in addition made a special contribution to the church building fund of $1,000. If Kathy files her tax return in January (prior to receiving the receipt from the church), is her $1,000 contribution to the building fund jeopardized? The official comments to the final IRS regulations leave no doubt that this contribution may be disallowed if Kathy’s tax return is audited. The IRS stated that a donor who files a return before receiving a receipt from a charity cannot “correct” this situation by filing an amended tax return since “a written acknowledgment obtained after a taxpayer files the original return for the year of the contribution is not contemporaneous within the meaning of the statute.”
Key point. Church treasurers must take the contemporaneous requirement seriously. Donors who file tax returns before receiving a proper receipt from the church may lose a deduction for every individual contribution of $250 or more. Filing an amended return will not help. Our recommendations: (1) Issue receipts as soon as possible after the start of each new year. (2) Advise donors at the end of each year not to file their tax returns until they have received a written acknowledgement of their contributions from the church. This communication should be in writing, and should be placed in the church bulletin or newsletter for the last few weeks of each year or included in a letter to all donors. Here is some sample wording: “IMPORTANT NOTICE: To ensure the deductibility of your church contributions, please do not file your income tax return until you have received a written acknowledgment of your contributions from the church. You may lose a deduction for some contributions if you file your tax return before receiving a written acknowledgement of your contributions from the church.”
Key point. Donors can continue to use canceled checks to substantiate individual contributions of $250 or more.
Multiple contributions. This is the biggest surprise in the final regulations. Let’s say that Don makes ten separate contributions to his church during 1997 of $250 or more. Must the church issue a written receipt that lists each of these contributions separately, or can the ten contributions be lumped together as one amount? The official comments to the final regulations contain the following statement: “[F]or multiple contributions of $250 or more to one charity, one [receipt] that reflects the total amount of the taxpayer’s contributions to the charity for the year is sufficient.” In other words, the church is free to lump all of Don’s contributions together as one amount on its receipt.
Key point. Most churches currently itemize individual contributions on receipts provided to donors, and many will want to continue this practice even though it is not legally required. A receipt that merely provides donors with a lump sum of all their contributions will be of no value to a donor who wants to correct a discrepancy.
Key point. The official comments to the final regulations also confirm that multiple contributions of less than $250 are not combined to trigger the substantiation rules applicable to contributions of $250 or more.
Out-of-pocket expenses. Let’s say that Greg, a member of First Church, participates in a short-term missions project and in the process incurs $300 of unreimbursed out-of-pocket travel expenses. The IRS has long acknowledged that such expenses are deductible as a charitable contribution. But what about the new rules for substantiating charitable contributions of $250 or more? Do they apply to this kind of contribution? Is the church responsible for keeping track of Greg’s travel expenses in order to determine if they are $250 or more? Must it issue a receipt that states the amount of travel expenses incurred?
The proposed regulations issued by the IRS last year specified that where a taxpayer incurs unreimbursed expenses in the course of performing services for a charitable organization, the expenses may be substantiated by an “abbreviated written acknowledgment” provided by the charity containing the following information:
- a description of the services provided by the donor
- the dates when the services were provided
- whether or not the charity provided any goods or services in return, and
- if the charity provided any goods or services, a description and good faith estimate of the fair market value of those goods or services
In addition, the abbreviated written acknowledgment must be received by the taxpayer before the earlier of (1) the date he or she files a tax return claiming the contribution deduction, or (2) the due date (including extensions) for the tax return for that year.
In response to several comments, the final regulations drop the requirement that the abbreviated acknowledgment include the dates on which the volunteer services were performed. However, the final regulations keep the other requirements of the abbreviated acknowledgment summarized above.
Example. Here is an example of an abbreviated written acknowledgement that complies with the final regulations:”Greg Jones participated on a missions trip sponsored by First Church in the nation of Panama. His services included working in a medical clinic. The church provided no goods or services in return for these services.” The church should be sure that Greg receives this receipt before the earlier of (1) the date he files a tax return claiming the contribution deduction, or (2) the due date (including extensions) for the tax return for that year.
Form of contribution. In releasing the final regulations the IRS also addressed the question of whether a written receipt acknowledging contributions of $250 or more must be in a particular format. The IRS noted that “as long as it is in writing and contains the information required by law, a contemporaneous written acknowledgment may be in any format.”
The IRS noted that it is authorized by law to issue regulations allowing charities to satisfy the new charitable contribution substantiation requirements (for contributions of $250 or more) by filing a return with the IRS including the necessary information. This kind of reporting has not yet been implemented. However, in releasing the final regulations the IRS noted that it is examining “whether any existing IRS forms can be modified to assist in their use in substantiating charitable contributions.”
This article originally appeared in Church Treasurer Alert, February 1997.