Is Your Organization’s Required “Donation” Jeopardizing Donor Tax Deductions?

By Sarah Huang CPA, Tax Senior Manager

Story Highlights

Which types of donations are eligible for a deduction?

What are the substantiation requirements for the donation itself?

Just because something is called a donation, doesn’t mean it yields a charitable donor tax deduction. In fact, many charities offer programs wherein participants are required to make a “donation” prior to partaking. When trying to determine whether a donor can claim this payment as a deductible charitable contribution, one must evaluate all the facts.

The Internal Revenue Code does not provide a definition for what constitutes a charitable gift. Instead, it provides rules regarding the deduction limits, which types of donations are eligible for a deduction, and the substantiation requirements for the donation itself. For the definition of a gift, one must look to case law.

The court system has defined a gift to be something that is:

  1. Voluntary in nature, and
  2. Motivated by a detached and disinterested generosity.

Using the above definition, a donation that is required, and thus not voluntary in nature, would fail to meet the criteria for a “gift.” As such, the IRS would most likely view the payment as a program fee, rather than a payment yielding a charitable deduction for the donor.

Some charities combat this issue by advertising a “suggested” donation instead of a required donation. By removing the donation requirement, it is possible that the amount may qualify as a gift. However, the donor’s charitable deduction may still be limited if he or she receives something of value in exchange for the suggested donation.

For example, say a charity hosts a benefit concert and posts signage indicating a suggested donation of $50 to attend the concert. Similar concert tickets are typically sold for $50, so the charity sets the suggested donation at the same amount. An attendee who pays the suggested donation is not entitled to a charitable deduction, as the attendee is receiving something valued at $50 in exchange for the $50 suggested donation.

When determining whether a donation is eligible for a charitable deduction, it can be helpful to ask the following questions:

  • Is each participant required to pay the “donation?”
  • If a participant does not pay the “donation,” is he/she ineligible to participate in the program?
  • Does each participant pay the same amount?
  • Is the “donation” amount stated on materials that advertise the program?

If the answers to the questions above are yes, the IRS will likely classify the payment as a program fee rather than a donation. This is because the voluntary nature and generosity elements associated with a gift are missing.

It’s important to remember that it is the donor’s responsibility to determine whether a donation qualifies as a tax deduction. That said, charities should remember that donors often rely on materials the charity provides when determining the charitable deduction for the year. Therefore, charities must be diligent about ensuring that their event information and donor acknowledgement letters are not providing misinformation about potential tax deductions.

For more information about required donations and tax deductions, please contact Clark Nuber’s Sarah Huang at info@clarknuber.com.

© Clark Nuber PS, 2017. All Rights Reserved

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