Nonprofits are aware that it is to their benefit when donors receive tax deductions for their donations. It is important that organizations and potential donors are aware that there are certain situations when donations are not considered tax deductible, sometimes surprisingly so.
There are also instances that when certain requirements had been met, the donations would have qualified as tax deductible. The IRS offers rules and guidelines related to this topic, in Publication 526.
Below are a few common assumptions that may seem straightforward.
Assumption 1: I made a $500 donation to a qualified organization. So, I can deduct the $500 as a charitable contribution.
Answer: Maybe. In order to deduct a donation more than $250, a donor is required to have a written acknowledgment of the donation, including:
- The donor’s name;
- The donation amount;
- That no goods or services were received in return for the donation (if goods or services of $75 or more were received, then that amount would be excluded from the deductible amount);
- The written acknowledgement does not need to be sent with the donor’s tax return; but, the donor needs to have it by the time his tax return is submitted. It should also be kept in case of an audit.
Assumption 2: I volunteered my services as a graphic designer for a qualified organization’s website. Therefore, I can deduct the fair value of my time and expenses incurred in order to assist with that project.
Answer: Partially. Services volunteered to charitable organizations are not deductible. But, unreimbursed expenses can be. The expenses must be directly related to the services provided, such as transportation expenses to get to the location and out-of-pocket expenses (e.g., printing, phone, supplies, etc.). Again, documentation of those expenses should be kept.
Assumption 3: My neighbor has a long-term illness and the neighborhood residents wants to raise money for him. I heard that the IRS does not consider donations made directly to individuals to be tax deductible. Instead, I will make a donation to a qualified organization that helps needy individuals and specify that I want my donation to go directly to help him.
Answer: Not quite. This donation would still not be considered tax deductible. The IRS states that a donation to a qualified organization specifying a recipient is not deductible.
Assumption 4: Our company can post a message in a qualified organization’s ad journal and deduct the cost as a charitable deduction.
Answer: It depends. If a benefit is received for a donation, then the fair value of that benefit is not deductible. Posting a message that is related only to the organization/honoree, but includes the company’s name, logo, and slogan is not considered to provide a direct benefit to the company, and may be considered a charitable deduction. If the message contains qualitative information about the company, such as endorsements or price information, that would constitute an advertisement. It is important to note, that the advertisement’s fair value would need to be deducted; but, any amount in excess could be considered a donation. Plus, part of the ad being deemed an advertisement does not disqualify the whole donation.
If you have questions about charitable donations as an individual or as a business owner, please give us a call. We can help you sort through the type of donation being made and identify if it’s a taxable deduction.