Many people, both privately and publicly, are thinking about making charitable contributions as 2022 winds down. Donors must be aware of the specific regulations in order to avoid losing significant tax deductions in light of recent judicial decisions establishing “tight conditions” to claim tax deductions for charitable contributions. It is also vital for organizations that receive gifts to assess their gift receipt and reporting procedures to guarantee compliance with federal tax law and to avoid creating difficulties for donors who are attempting to claim such deductions.
The Fundamentals
Gifts to approved charities within the tax year can be written off. To be eligible, an organization must meet the requirements of Section 501(c)(3) of the Internal Revenue Code and have received a decision letter from the IRS stating that it is exempt from federal income tax (3).
Donors need to keep documentation showing the name of the organization, the date of the gift, and the amount given in order to claim tax deductions. This documentation might be in the form of a bank statement or a letter from the recipient organization. Additional conditions for a charitable deduction are listed below and vary according on the amount of the donation.
Charitable Receipt
Written documentation of a donation from the recipient organization, often known as a charitable receipt, is required for any donation above $250. A receipt can be in the form of a handwritten note of appreciation, an electronic message of thanks, or an annual report of donations. Any receipt issued by the recipient organization must contain the following information regardless of its format:
Any items or services delivered by the organization must be itemized, and their fair market value must be estimated on the receipt. This is a regular occurrence when a nonprofit organizes a gala or banquet and accepts donations to pay the expense of the dinner and to raise money for the nonprofit. All nonprofits should check their receipting practices to make sure they follow these guidelines to forestall any inquiries from contributors or the IRS.
Most recipients of donations also include the date and amount given on the receipt to accommodate the donor’s need to keep track of these details for tax purposes. The donor must have the receipt in hand before the earlier of (1) the date the tax return is due (including extensions) for the tax year in which the donation was made, or (2) the date the tax return is filed.
The U.S. Tax Court ruled earlier this year that a deduction for charitable contributions that lacked a receipt or other contemporaneous written acknowledgement was improper. By way of deed of gift, taxpayers in Albrecht v. Commissioner, T.C. Memo. 2022-53 gave a portion of their Native American jewelry collection to a museum. However, the deed of gift did not specify whether or not the donors received any in-kind benefits from the museum. The court ruled that the taxpayers did not “satisfy the strict requirements” of Internal Revenue Code section 170 and were therefore not entitled to a deduction for their donation because the deed of gift did not state that it was the entire agreement between the parties and the museum did not issue a separate receipt to the taxpayers. It’s worth noting that no one contested the taxpayers’ good faith in making a charitable contribution; nonetheless, the IRS nonetheless invalidated the whole deduction.
Additional Requirements for Property Donations
When the value of the donated property, including any virtual money, exceeds $500, extra documentation is required for tax deduction purposes. Noncash charitable contributions (i.e., those valued at more than $500) require the donor to submit IRS Form 8283, Noncash Charitable Contributions, and attach it to their tax return in order to be eligible for a deduction. If you’re making a donation of property worth more than $500 but less than $5,000, you need fill out only Section A of Form 8283.
If the value of the donated property is greater than $5,000, the donor must get a qualified documented appraisal and fill out Section B of Form 8283. All mandatory fields on Section B of Form 8283 must be completed by the donor. The Internal Revenue Service (IRS) places special emphasis on the accuracy of the donor’s disclosure of the property’s description, fair market value as of the date of contribution, date of acquisition, method of acquisition, and cost or adjusted basis. The cost or adjusted basis of a donor is typically lower than the fair market value, and the IRS may try to reject a deduction if the donor does not disclose the correct cost or adjusted basis. The donor must also get signatures from both the competent appraiser and the recipient organization on Form 8283.
In the case of donations of property valued at over $5,000 but less than $500,000, the donor should just attach the qualified appraisal to Form 8283 and keep it in their possession. With that said, if you’re claiming a deduction for a carryover contribution from a previous year, you’ll need to include the qualifying appraisal with your Form 8283 and file it with your tax return.
Requirements for a Professional Evaluation
For an appraisal to be considered “qualified,” it must have been prepared by a “appraiser,” which is defined as “a person who has obtained an appraisal designation from a recognized professional organization or who otherwise has sufficient education and experience and who routinely performs appraisals for compensation.” All of the following components are required for a competent appraisal:
Without meeting the qualified appraisal standards, the 4th U.S. Circuit Court of Appeals ruled against a deduction for a charitable contribution in a case released last year. When the taxpayers in Mann v. United States, 984 F.3d 317 (4th Cir. 2021) donated their home to a charity that deconstructed houses (i.e., removed salvageable materials from the house prior to demolition) and provided job training opportunities to disadvantaged members of the community, the charity claimed the donation as a tax deduction. The taxpayers had two appraisals done: one for the whole value of the property and another for the value of the building materials that could be salvaged and resold separately. Both appraisals failed to reflect the fair market value of the provided property, so the court disallowed the deduction.
Conclusion
Recent court decisions highlight the importance of complying with the “strict requirements” necessary to substantiate a tax deduction for charitable contributions, even though the Internal Revenue Service and courts have determined minor errors by taxpayers constitute substantial compliance with the requirements. Donors should keep thorough records of their charitable contributions throughout the year, acquire a receipt from the organization receiving the donation (if one is not already provided), and complete Forms 8283 and qualified appraisals as necessary to file with their tax returns.
For gifts of property valued at more than $5,000, tax-exempt organizations are required by law to complete and sign Form 8283, Part V, and send a receipt to the donor that complies with federal tax law.
Contact Credo to learn how you can avoid the procedural mistakes that would invalidate your charitable donation tax deductions.