An overview of charitable contributions
Know the requirements and the nuances that accompany donations
Andrew Seifert, JD, tax consultant, Wipfli LLP | June/July 2022 Footnote
Editor's note: Updated May 25, 2022
“It is in giving that we receive.” — St. Francis of Assisi
St. Francis of Assisi was not likely contemplating the tax benefit donors receive when making charitable contributions. Charitable contributions are a great way to further taxpayers’ philanthropic goals while also reaping a tax benefit. As evidenced by trending IRS enforcement and recent court rulings, charitable contributions are a great benefit to taxpayers so long as they strictly comply with the rules.
The following discussion highlights some major areas to focus on when planning for charitable contributions. As types, methods and attributes of contributions vary widely, this discussion is not an all-inclusive reference manual but rather should be used as a primer for additional research.
General rules: What is a charitable contribution
The legislative intent behind the allowance of federal income tax deductions for charitable contributions is to encourage taxpayers to participate in charitable giving. Charitable giving supports qualified charitable organizations in furthering their objectives while lessening the government’s burden of achieving similar objectives.
1
A charitable donation is defined as a voluntary donation of cash or property to, or for the use of, a qualified organization, but only to the extent it exceeds the value of any goods or services received (or expected to be received) in return (not quid pro quo, discussed later).
2 In order to be deductible for federal income tax purposes, the contributions must be made to, or for use of, qualified donee organizations.
3 The Internal Revenue Code offers a list of qualified donee organizations in Section 170(c). If a donee organization does not meet the criteria of this list, the taxpayer will not receive a deduction for her charitable contribution.
General rules: Quid pro quo issues
A contribution will not be deductible to the extent that the taxpayer receives goods, services or other value in return for the contribution (quid pro quo). Any transfer in which the taxpayer receives or expects to receive a financial return corresponding with the value transferred to the charity will lack donative intent.
4 There is an exception to these rules for taxpayers who receive solely intangible religious benefits that generally are not sold in a commercial transaction outside the donative context (this is more likely the benefit St. Francis of Assisi was referring to).
5
An example of a quid pro quo donation includes charitable golf outings. In the instance of a charitable golf outing, only the amount in excess of the cost of the golf round is available to be deducted as a charitable contribution.
General rules: Timing of contributions
An income tax deduction for a charitable contribution is allowed in the tax year in which the contribution is “paid.”
6 The contribution is considered to be “paid” either when the mailing or delivery to the charitable donee occurs or when the donor has surrendered dominion or control over the asset being contributed.
7
The timing issue of charitable contributions is most crucial for contributions made at year-end. Contributions made at year-end often carry the risk of being pushed into the subsequent tax year.
General rules: Substantiation requirements
There are very specific substantiation rules which apply, depending upon type of contribution. To properly claim a deduction for a charitable contribution, the Internal Revenue Code and regulations require specific substantiation requirements to be met by the taxpayer.
8 The required substantiation is meant to prevent taxpayers from claiming deductions that exceed the actual payment given or the value of the contributed property.
All contributions require a minimum level of substantiation to be met by which taxpayers can provide proof of the contribution to the charity.
9 However, depending on the amount or type of property, further substantiation requirements must be met.
For donations of cash, check or other monetary instrument, the donor must maintain at least one of the following as proof of a contribution: A canceled check; a receipt from the donee charitable organization; or other reliable written records in the absence of a canceled check or receipt from the charitable organization.
10
For any contribution of $250 or more the donor must obtain a contemporaneous written acknowledgment letter from the donee organization.
11 The written acknowledgment letter must contain the following:
- The amount of cash and a description (but not the value) of any property other than cash contributed.
- Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property contributed.
- A description and good faith estimate of the value of any goods or services provided by the donee organization or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.12
- The donor must contemporaneously receive this letter before the earlier of these two dates:
- The date the donor files her tax return claiming the deduction.
- The due date of the tax return (including extensions).13
For contributions exceeding $500, Form 8283 must be completed and attached to the tax return for the year that the deduction is claimed.
14 A qualified appraisal must be obtained if property is contributed that exceeds more than $5,000 in value.
15 Further, the taxpayer is required to attach the qualified appraisal to the income tax return for contributions of art that have $20,000 or more in value or property valued at more than $500,000.
16
General rules: Risk and due diligence
If the substantiation rules are not satisfied, the IRS and the courts will deny charitable contribution deduction, even if they agree that a charitable contribution was actually made and if they agree with the claimed fair market value (FMV) of the contribution.
The importance of substantiation is reinforced by a 2016 Tax Court decision. In 15 West 17th Street LLC v Commissioner, a $64,490,000 charitable contribution of a conservation easement was denied in full. The court upheld the IRS disallowance of the deduction because the acknowledgment letter, which was given to the taxpayer by the donee organization, did not specifically state whether the taxpayer had received any goods or services from the donee in exchange for the easement (they had not).
17 This is an example of how important it is to maintain strict compliance with the charitable contribution rules.
Keep requirements in mind
The government has an interest in promoting charitable contributions by offering federal income tax deductions. However, there are specific requirements taxpayers must meet for their charitable contributions to be deductible. For tax advisers, it is important to be aware of these requirements and the nuances that accompany them.
Andrew Seifert, J.D. is a member of the National Tax Office of Wipfli LLP, where he assists clients with complex tax issues, transactional advising and overall business consulting. In addition, Andrew serves as an adjunct faculty member of the University of Minnesota’s Masters of Business Taxation program and frequently presents on tax-related matters. You may reach him at aseifert@wipfli.com or 651-766-2856.
1 Neher v. Commissioner, 852 F2d 848 (6th Cir. 1988).
2 IRC Section 170(c).
3 A list of qualified donee organizations is described under IRC Section 170(c).
4 Rev. Rul. 86-63.
5 IRC Section 6115(b).
6 IRC Section 170(a)(1) and Treas. Reg. Section 1.170A-1(a).
7 Treas. Reg. 1.170A-1(b).
8 Treas. Reg. Section 1.170A-13.
9 Treas. Reg. Section 1.170A-13(a)(1).
10 Id.
11 IRC Section 170(f)(8) and Treas. Reg. Section 1.170A-13(f).
12 IRC Section 170(f)(8)(B)(i)-(iii).
13 IRC Section 170(f)(8)(C).
14 Treas. Reg. Section 1.170A-16(c).
15 Treas. Reg. Section 1.170A-16(d)(1)(ii).
16 Treas. Reg. Section 1.170A-16(e) and IRS Publication 561.
17 15 W. 17th St. LLC, v. Commissioner, 147 TC 557 (2016).
