What would be your reaction to a letter from the IRS saying that you owe money because your charitable deductions are being disallowed? Anger? Confusion? Regret? All of this can be avoided by staying educated on the rules for deducting charitable contributions.
Substantiation is key! For cash contributions under $250, keep “proof,” such as a receipt, cancelled check, note, email or other written communication from the charity. For larger cash contributions, contemporaneous, written acknowledgement is required. This must include the amount given and whether any goods or services were received in return (with a description and good faith estimate of the value of these goods or services). The value of goods or services received in return reduces the allowable charitable contribution.
IRS guidance provides the following example: “Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2013. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.” In this example, only $290 is allowed as a charitable deduction. Even if nothing was received in return, the letter should state so by saying: “No goods or services were provided in exchange for your contribution.”
For non cash contributions, the amount of substantiation required depends on the amount of the donation. The records you keep (in written form from the organization) should always include the name of the organization, the date, and the location of the contribution. If impractical to obtain receipts for non cash donations under $250, then donor must maintain reliable written records. Your personal records should also state the fair market value and how you calculated it. For non cash donations over $250, the contemporaneous, written acknowledgement rules apply as well. For items over $500 you must also track how you got the property, the date acquired and the cost basis.
Even if you have a letter, make sure it has the required statements in it! In the R.C. Memo 2012-140 ruling, the Durdens were denied their deduction of cash contributions to their church, despite having written acknowledgement from the church and copies of cancelled checks. Why? The letter did not contain the required statement that no goods or services were received in return for the charitable contribution
Sound simple? Maybe not. In the April 8, 2015 tax court memorandum decision 2015-71, Kenneth and Susan Kunkel lost to the Commissioner on grounds that non cash charitable deductions on their 2011 tax return did not meet the contemporaneous, written acknowledgement requirements. Even though each donation was claimed to be under $250, the court held that written acknowledgement was required since (1) the fair market values were not assessed until the tax return was filled out so it would have been impossible to know batches were under $250 at the time of donation, and (2) it would have taken almost 100 separate trips to donate (in batches under $250) the totals reported to some of the charities. What about the records they did keep? One example shows the records for veterans’ organization donations consisted of “doorknob hangers” left when donations were picked up from the house – these were not dated and did not specify the taxpayer or describe the property donated.
Over $37,000 was deducted on their tax return for non cash contributions and when this was disallowed, they owed $12,000 in taxes and almost $2,500 in accuracy-related penalties! Better record-keeping, like pictures of the items picked up by the veterans’ organizations or dropped off at the church flea market could have helped. Written acknowledgement from the church should have been obtained, considering the church was equipped to do so and provided receipts for 2012 flea market contributions. To help determine fair market value, the church should have followed up with what was sold at the flea market and at what price.
These rules only cover the basics of taking a deduction for charitable giving. Appraisal rules apply for donations over $5,000. Special rules also apply for donations of services, vehicles, inventory, capital gain property, art, and conservation easements. Even the basic rules can be difficult to understand and fulfill, so it is best to consult your tax advisor regarding the rules for charitable contributions if you plan to itemize deductions on Schedule A of your tax return.