The 2017 tax reform law gives donors more of an incentive to make charitable contributions, increasing the deduction allowed for cash contributions to public charities from 50 to 60 percent of adjusted gross income. Substantiating that deduction, however, may be more challenging due to recently finalized IRS regulations.
Published in the July 30, 2018 Federal Register, the final regulations on Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions emphasize the importance of rigorous documentation to support charitable contributions. The government has long held a “form-over-substance” stance, and the final regulations will make it even more critical than ever that donors keep accurate and complete records of their charitable contributions.
The new regulations should also get the attention of donee organizations. Not-for-profit organizations that rely heavily on ongoing donations from the public have a vested interest in helping donors get the information they need to correctly substantiate their charitable deductions. These organizations would be wise to educate donors on the final regulations, and to adjust their internal processes to help ensure that their donors’ tax deductions will be allowed.
What Changed with Charitable Contribution Deductions
As under previous law, donors who want to take a charitable contribution deduction must have “contemporaneous written acknowledgment” for any contribution of $250 or more. The written acknowledgment must include:
- The amount of cash and a description (but not value) of any property other than cash contributed;
- A statement of whether the donee organization provided any goods or services in consideration, in whole or in part, for any such cash or property; and
- A description and good faith estimate of the value of any such goods or services provided the donor in consideration of the donations, or if such goods or services consist solely of intangible religious benefits, a statement to that effect.
The new final regulations clarify that a blank pledge card provided by the donee organization is not adequate substantiation. Taxpayers must maintain either a bank record, or a written communication from the donee that shows the name of the donee organization, the date of the contribution, and the amount of the contribution in order to substantiate monetary charitable contributions to a public charity. The final regulations clarify that a bank record includes a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement. They also clarify that written communication from the donee organizations includes an email.
As stated, a blank pledge card provided by a donee organization to a donor does not show the required information, and as such it is not sufficient substantiation for a cash, check, or other monetary gift. This same principle was clarified in a recent tax court decision involving a donation of noncash property.
Mr. Smith Goes to Tax Court
A blank card from the donee organization also does not substantiate a charitable donation of noncash property, which was recently clarified in a Tax Court case, Smith v. Commissioner, TC Memo 2014-203, which involved Smith’s donation of clothing, furniture, and old electronic equipment to the American Veterans National Service Foundation (AMVETS).
AMVETS provided a mostly blank receipt to Smith, similar to what many other donation-reliant charities do, such as the Salvation Army and Purple Heart. Smith’s claimed deduction on his 2009 return for those items totaled $27,767, so the Court addressed the requirements for:
- Cash and noncash contributions of $250 or more
- Noncash contributions exceeding $500
- Noncash contributions exceeding $5,000
Cash and Noncash Contributions of $250 or More
The required contemporaneous substantiation from the donee must contain a description of any property the taxpayer transferred to the donee. The substantiation is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of:
- The date the taxpayer files a return for the year of contribution; or
- The due date, including extensions, for filing that return.
AMVETS gave otherwise blank pre-signed receipts to Smith, who later filled them out by inserting supposed donation values. Because the forms were signed before the property was allegedly donated, the Court questioned whether that constituted an acknowledgment that the charity received anything.
Although Smith created a spreadsheet listing the property that he claimed was contributed, the AMVETS tax receipts did not contain a description of any property contributed (because they were blank). That led the Court to question whether the spreadsheet was ever provided or seen by AMVETS.
Noncash Contributions Exceeding $500
Although the value of Smith’s claimed contributions, when aggregated, exceeded the values applicable to this rule, for the sake of completeness, the Court addressed the substantiation requirements of noncash contributions of $500 up to $5,000. Requirements for this tier provide that taxpayers must obtain all of the substantiation specified at the previous tier, and must also maintain reliable written records with respect to each item of donated property. These records must include at a minimum:
- The approximate date the property was acquired and the manner of its acquisition;
- A description of the property in detail reasonable under the circumstances;
- The cost or other basis of the property;
- The fair market value of the property at the time it was contributed; and
- The method used in determining its fair market value.
The taxpayer must also include “a description of such property and such other information as the Secretary may require” in his tax return.
Smith allegedly made noncash contributions to AMVETS of clothing, furniture, and electronic equipment, and for each category of items he claimed a value exceeding $500. But he did not maintain written records establishing when or how these items were acquired, or the cost basis of the items.
Smith also did not maintain written records establishing the items' fair market value at the time they were donated. He testified that he determined these values using a guide from a Salvation Army website, but the values he used were considerably higher than the “high” values the guide displays. He did not maintain photographs or other records to establish the condition of the donated items, and thus did not provide a reason to believe that each donated item should be accorded a “high” rather than a “low” value.
For all of these reasons, the Court said that the substantiation requirements for donations of property valued in excess of $500 were not satisfied.
Noncash Contributions Exceeding $5,000 but Less Than $500,000
For contributions of property (other than publicly traded securities) or similar items of property valued in excess of $5,000 but less than $500,000, the taxpayer must generally satisfy all of the substantiation requirements for property with values in excess of $500, and in addition:
- Obtain a “qualified appraisal” of the items; and
- Attach to her/his tax return (and for all carryover years’ returns) a fully completed appraisal summary.
Under the regulations, “[T]he term qualified appraiser means an individual with verifiable education and experience in valuing the relevant type of property for which the appraisal is performed,” has not been barred from practicing before the IRS, and otherwise meets the requirements of Reg. Section 1.170A-17(b). The education and experience requirement is met if the appraiser successfully completes (with a passing grade, for example) professional or college-level coursework in valuing the relevant type of property, and has two or more years of experience in valuing the relevant type of property; alternatively, the appraiser meets the requirement by earning a recognized appraisal designation for the relevant type of property.
For each qualified appraisal, the qualified appraiser is required by Reg. Section 1.170A-16 to sign under oath a declaration that includes specific language in order to insure that he understands what his appraisal is being used for and that he can be subject to penalties separate from the taxpayer.
Although Smith’s spreadsheets show no items with values in excess of $5,000, he failed to aggregate his contributions of similar property.
Since Smith did not obtain a qualified appraisal for any of the items and did not attach a fully completed appraisal summary to his 2009 tax return, he failed to satisfy the substantiation requirements for his claimed contributions. For documentation of noncash contributions in excess of $500,000, the entire qualified appraisal must be attached to the return.
How Not-for-Profit Organizations Can Help Their Donors
Although the responsibility for substantiating a charitable deduction falls to the individual, not-for-profit organizations can make it easier for their donors to meet their substantiation requirements. Written educational materials or other forms of guidance would help donors understand these requirements. Additionally, charities should discontinue the use of blank pledge cards helps or contribution receipts to ensure that donors obtain the available incentives for their contributions. In turn, tax-incentivized donors may help the not-for-profit organization continue to receive public support.
For questions regarding you charitable contributions, please contact us.
Substantiate, Substantiate, Substantiate: A Friendly Reminder for Not-for-Profit Organizations and Their Donors
Bill Smith is a Managing Director for CBIZ MHM’s National Tax Office. He can be reached at 301.907.2412 and firstname.lastname@example.org.
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