Filed under: Not-for-Profits

February 7, 2020

Issuing a donor receipt seems like a simple task, especially in today’s technological era. Many online giving platforms used by charities issue a receipt automatically, taking the burden off the development staff and reducing a charity’s overhead costs. Around the beginning of each calendar year, charities receive numerous requests from donors for receipts to support a tax deduction on their personal income tax returns. It is crucial that these receipts issued by the charity include all the required elements. Failure to include the proper elements may cause a disallowed tax deduction for the donor.

Am I Required to Issue a Donor Receipt?

Usually the burden of obtaining a donor receipt falls on the donor. However, many donors do not realize it is their responsibility and instead expect the charity to issue receipts in all instances.

There is one instance when a charity is required by law to issue a donor receipt. When a donor receives goods or services in exchange for a single donation greater than $75, the charity is generally required to issue a receipt. This is called the “quid pro quo” requirement. Three exceptions to the “quid pro quo” requirement exist, generally when small dollar amounts are involved. See Requirement 6 below for more details.

What is the Penalty if I Don’t Issue a Receipt?

If the charity is required to issue a receipt under the “quid pro quo” rules but fails to do so, it may be subject to a monetary penalty of $10 per contribution, up to $5,000 for each specific campaign. When no receipt is required, no monetary penalty is assessed as the burden is on the donor to obtain a receipt.

However, the big penalty for the charity is not the monetary one but rather the “donor relations” penalty. If a donor’s tax deduction is disallowed due to an inadequate receipt, the donor may not make future donations and will probably view the charity to be at fault for not issuing a proper donor receipt.  In the age of social media, it is easy for something negative like this to go viral. No charity wants to be on the receiving end of such news.

What Does the Receipt Look Like?

The receipt can take many forms – email, thank you note, formal mailed receipt, postcard, etc. However, no matter the form, every receipt must include six items to meet the standards set forth by the IRS.

What is Required on the Donor Receipt?

Six basic elements are required on every receipt issued by a charity to allow a tax deduction for a donor.  Omitting any of these elements has the potential to disallow a tax deduction for the donor. The IRS has taken a harsh approach in recent years and disallowed charitable deductions simply due to a receipt error.

1. Name of the charity and name of the donor

Each donor receipt should include the name of the charity and name of the donor. Many donor receipts also include the charity’s address and EIN, although this is not required. The donor, however, must have records of the charity’s address. As a best practice, charities may want to consider including this information in the receipt, so the donor has all the required information needed to support a tax deduction.

2. Date of the contribution

The contribution date technically isn’t required on the donor receipt. The requirement is that donors must keep records showing the date of their donations, either through cancelled checks, bank statements, or credit card statements. Unfortunately, many donors don’t keep this information.  When these records don’t exist, the IRS allows a donor receipt to serve as a record for the contribution date. This is why donor receipts should include the date of the contribution. If the donor receipt doesn’t include the date, the contribution may be disallowed entirely.

Determining the date of donation seems simple, but often charities report the wrong date. Most issues seem to happen around year end, when a donor mails a check in December but the charity doesn’t receive it until January. Charities must be extra careful to report the correct date on the donor receipt. Otherwise a donor may be disallowed a tax deduction in that year due to the incorrect date.

What is the proper date to report in the above scenario? For a donor who mails a check to a charity that properly clears the bank in due course, the contribution date is the postmark date on the transmittal envelope.

For credit card donations, the date of the donation is the date on which the charge has been made, not the date on which the donor actually pays the credit card bill. There is uncertainty on what a charity should do when it receives a request to charge a credit card prior to the calendar year end but doesn’t do so until early January. The IRS has provided no guidance on this situation. However, applying the logic that a donation is considered “made” when the donor gives the charity the ability to access the funds, it seems reasonable that the contribution date should be the date on which the donor authorizes the transaction. This would be similar to a charity receiving a donation via check prior to year end but not depositing the check until the next calendar year.

3. Detailed description of the property donated

For cash donations, the receipt should mention that cash was received.

For noncash donations, a more detailed description of the item or items donated should be included. Multiple items of similar nature can be grouped together, such as books, clothing, and decorations. However, try to be specific when possible since this receipt serves as the donor’s record for the noncash donation.

For a donation of real property, it is recommended to put the physical address on the receipt. This makes it easy for the IRS to match it to the property appraisal.

For stock donations, the number of stock shares and the company name should be reported.

4. Amount of the contribution, but only if cash was received

When cash is donated, the dollar amount must be included on the receipt.

When the donation is a noncash item, never include a value on the receipt. The donor is responsible for obtaining a proper valuation for noncash contributions. Even if the charity is knowledgeable in valuing the item donated (such as a museum receiving artwork), the charity should never include the value on the receipt. This potentially puts liability on the charity, in which the donor may point to the charity as the source for the value of their tax deduction. No charity wants to be involved in a donor’s tax dispute with the IRS.

Stock donations are considered noncash. Charities frequently report the value of the stock on their donor receipts. Sometimes the sales price of the stock is reported; other times it is the value of the stock on the date received. Caution should be exercised here. Specific rules are associated with a donor’s charitable deduction for stock. If a charity includes the stock value on its receipt, the wording should be carefully crafted to not suggest the amount reported is the tax deduction allowed for the donor.

5. A statement whether any goods or services were provided in exchange for the contribution

This is one of the most important items to include in the receipt. Unfortunately, it is one of the most commonly missed. The IRS has disallowed deductions to donors where the receipt does not contain this language. Something as simple as the following meets this required element: “No goods or services were provided in exchange for this donation.”

6. If applicable, the value of the goods or services provided by the charity to the donor and a statement indicating the tax deduction may be limited

When a charity provides something to the donor, information regarding the value of the goods or services is generally required on the receipt. This is often called “quid pro quo.” Disclosure to the donor is required when the donor makes a donation of more than $75. Donations for $75 or less are generally excluded from this reporting. However, as a best practice, charities may want to do so anyway.

Additionally, a statement should appear on the receipt indicating that the contribution deductible for income tax purposes is limited to the excess money contributed over the value of that received. Something such as the following is adequate:

“Your charitable deduction for federal income tax purposes is limited to the excess of the amount of money contributed over the value of the goods or services provided by the charity.” 

Sometimes, the value of the goods or services provided are so minimal that they are excluded from reporting to the donor. There are three exceptions here: token exception, membership benefits exception, and intangible religious benefits. The rules are specific here and outside the scope of this article. The dollar thresholds for the token exception adjust annually based on inflation. Click here for a link to Rev. Proc. 2019-44 for the 2020 insubstantial benefit amounts.

What Should I Do Now?

We recommend all charities review their donation receipts annually to verify they contain all the required elements. Both the development staff and the accounting staff need to be aware of the rules and work together to verify all six required elements are included on the receipt. No charity wants to inadvertently prevent a donor from taking a tax deduction.

If there is ever any question on whether your receipt meets the required elements, please reach out to your tax advisor at Clark Nuber for assistance. We are happy to review your receipt template and provide suggestions.

© Clark Nuber PS, 2020. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.