Your organization just found out it will receive a donation of new laptops for the office. Do you know what type of information to include in an acknowledgment? A board member just found out that the parking and meals he has been paying for on the nonprofit’s time may be deductible. What type of information should be on his tax receipt? Can he take a tax deduction for in-kind donation? Tax deductions for in-kind donations can be a tricky area of nonprofit tax law to navigate. Let’s walk through a few examples to highlight when donors can (and cannot) take a tax deduction.
Generally, a donor may deduct an in-kind (or, non-cash) donation as a charitable contribution. And a donor must obtain a written acknowledgment from the charity to substantiate the gift, although the acknowledgment will generally not assign a dollar value to the donation.
Not only are the written acknowledgment requirements complex, especially for non-cash donations, but noncompliance can be costly (generally $10 per contribution).
In-kind donations generally fall into one of three categories:
- Direct payment by a donor of bill owed by the charity to a third party.
- Donations of goods.
- Donations of services.
The charity should provide a written communication or acknowledgment to the donor. For a nonprofit, it is a best practice to send the donor a written acknowledgment that includes the name and EIN of the charity, as well as the date received and a detailed description of the in-kind contribution.
In order for a donor to claim a donation that exceeds $250 as a charitable contribution on his/her federal income tax return, a written acknowledgment must be in the donor’s possession and it should include a statement about whether the donor received any goods or services in exchange for the donation (and if so, the value of the goods or services received).
In addition, for direct donations, the nonprofit should also provide a statement of the amount donated (i.e., the face value of the check, stock or the cash received). The typical donor acknowledgement would therefore read:
“Thank you for your contribution of $_____ that [your charitable organization] received on _____________[date]. No substantial goods or services were provided to you[, other than intangible religious benefits,] in exchange for your contribution.”
But for in-kind donations, the responsibility is on the donor to value the donation. Non-profits still have a responsibility to maintain good donor relations. A way to do this is by acknowledging the gift. The nonprofit may desire to state something like:
“Thank you for your contribution of [insert detailed description of goods/services donated] that [your charitable organization] received on _____________[dates]. Were it not for your generous donation, we would have had to expend $________ to procure such an item.* No substantial goods or services were provided to you[, other than intangible religious benefits,] in exchange for your contribution.”
*The organization should insert a note to explain to the donor that it is the donor’s income tax responsibility to determine deductibility and/or obtain valuation, and that the dollar figure provided above is for donor recognition purposes only.
Easiest for the donor and the charity to document and verify are direct payments by a donor of an amount owed by the charity to a third party, such as what was paid to the laptop vendor in our above example. An organization should, of course, confirm with the vendor that the invoice was paid (and not somehow discounted and then paid) and receive written confirmation from the vendor. Once confirmed, the charity may provide a written donor acknowledgment. You can read more about what should be included in donation acknowledgements more generally here.
But donations of goods are more complicated. The charity must still provide the written acknowledgment to the donor. The value of the donation is up to the donor, as described above, and if believed to be in excess of $5,000 in value is generally obtained from an IRS qualified appraisal. Further, if the charity sells or transfers the goods within three years of receiving, the charity must complete IRS Form 8282 (Donee Information Return) and file with the IRS.
Donations of services are more complicated still. Generally personal services are not deductible, however, the expenses associated with providing such services are. For example, if a business owner authorizes employees to use company time to provide services (such as an associate at a law firm), then payroll and associated costs are deductible, in addition to expenses directly related to the service. It is important for the donor to keep detailed records, such as of the parking and meal expenses in the opening example.
Again the nonprofit charity should provide a written acknowledgment to the donor. This particular acknowledgment should be substantially identical to the other acknowledgments, except that it should not contain a dollar amount for the costs or expenses. Instead, it should provide a description of the services and the year of the services. IRS Publication 1771 (PDF) contains examples of appropriate written acknowledgments for non-cash gifts.
A “charitable contribution” is tax deductible for a donor if it is “to” or “for the use of” a charity. According to IRS Pub. 526, “[a] contribution is “for the use of” a qualified organization when it is held in a legally enforceable trust for the qualified organization or in a similar legal arrangement” and “not set aside for use by a specific person.” Additionally, the case law in this area essentially equates “for the use of” with “in trust for.” This language is particularly tricky with regards to donations made directly to a third party on behalf of the qualified organization, such as a donor paying an expense of the organization directly rather than giving it to the organization first. For example, a donor might pay a catering company directly for services they rendered to the organization or a car repair business might provide their services to the organization for free. In both of these instances, the donations would clearly not be considered to have been held “in trust for” the organization. However, when this type of donation is made, the IRS normally gives the donor and the done more leeway in terms of its deductibility. Nevertheless, staffers at charities who provide donors with the appropriate written acknowledgments should proceed with caution in acknowledging in-kind donations to avoid any potential issues for the organization and/or the donor.
