The Nonprofit Donation Rules: Do You Know Them?

By Mark Schultz

The down economy and the recent decline in the stock market have put a double whammy on many in the nonprofit community.  With corporate earnings down and personal wealth declining with the stock market, many nonprofit organizations are finding their pool of donations a little drier this year.  Nonprofit executives struggle to identify new sources of donations and are considering new methods of bringing money to the organization.  But be careful!  Do you know the donation rules well?  Before its too late, let’s discuss some of the basics and several trickier issues relating to cash, and property donations.

As you know, contributions to nonprofit organizations exempt under Internal Revenue Code section 501(c)(3) are deductible to taxpayers who itemize deductions.  This is true regardless of whether they are made in cash or by check or in fair market value (FMV) of assets that are donated.  Contribution documentation is integral to your nonprofit. Without it, you risk losing your tax-exempt status.  If the donor contributes $250 or more, you must provide written substantiation of the contribution. But a canceled check alone won’t be enough.  Gifts given during a calendar year aren’t aggregated to meet the $250 threshold.  My suggestion, e-mail the receipt.  It saves time and postage and is acceptable.  Make sure you have your documentation together by the time your tax return is filed in any given year.   Also, if your nonprofit provides goods or services in return for the contribution of $76 or more, you must give a description and good faith estimate of the value of those goods and services.

While the rules for cash contributions are very straight forward, let’s look at the requirements for donations of property.  If a contribution is an outright donation of $250 or more of property, or cash and property, you must describe the property and state that the donor received nothing in return.  You don’t, however, have to put a value on the property.  

Additional record-keeping rules apply for larger gifts of property.  When donors make in-kind contributions of $500 or more, they’re required to complete Form 8283 and provide information about the contribution.  If the contribution exceeds $5,000, your nonprofit must sign off on Form 8283 and the donor must obtain an appraisal of the property.  There are some exceptions for some items like publicly traded stocks.  If Form 8283 and an appraisal are required, and if the donated item is disposed of within two years, you must report its disposition by filing Form 8282.

When a taxpayer sells property to your organization at its FMV, the transaction is treated as a sale or exchange.  When a taxpayer gives the property to your organization, he or she has made a charitable contribution.  But when a taxpayer sells the asset to a charitable organization for less than its FMV, he or she has made a bargain sale.  This is treated partly as a sale and partly as a charitable contribution.  The contribution amount is the excess of the property’s FMV over the amount your nonprofit paid.  The contribution is subject to all the same benefits, rules and restrictions as any other charitable contribution.  The value of donated services to a charity is not tax deductible.  However, out-of-pocket expenses incurred when providing services to a charity are.

In recent years, car donation programs have become the rage.  These programs encourage taxpayers to donate their used cars to the charity and they will be able to deduct the full blue book value regardless of the car’s condition.  But beware!  The IRS has become very concerned about car donation programs. The main areas of concern are that taxpayers may be deducting more than the true fair market value of the car, that promoters of these programs receive excessive benefits from these programs, and that insiders involved in the program cause a taxable event and unrelated business income tax may be triggered.  

Unrelated business income could be imposed when an exempt organization permits a third party broker to use its name in marketing its car donation program.  In return, the tax-exempt organization may receive a fee based on a percentage of gross receipts from the program.  In such cases, the organization may in fact be receiving revenues instead of a donation.  It is important that organizations know the rules and set up their programs so that they receive the maximum benefits. 

In addition, taxpayers may rely on the organization to help them get maximum value from their donation.  When we talk about fair market value of the donation, it is important to remember that there is no single correct method of determining this value.  One acceptable method may be the use of an established used car price guide.  However, it is important to remember that the prices published in these guides are only acceptable if it is for a car of the same make, model, and year, sold in the same area, and in the same condition, as the donated car.  If this cannot be done, then an independent appraisal may be the best route to use in determining the value.  

In the end, my advice is to keep plugging away at fundraising and other money generating activities but work closely with your Certified Public Accountant to be sure you stay out of trouble.  Keep up the good work.

Mark Schultz is a Principal and Co-Chair of the Nonprofit Practice at the accounting and consulting firm of Dugan & Lopatka in Wheaton.