(Thanks to the Nonprofit Law Blog for this helpful information.)

Article by Lisa Sargent

Head of Lisa Sargent Communications, copywriter Lisa Sargent publishes The Loyalty Letter, a free e-mail newsletter for nonprofit and charitable organizations, which is read by subscribers all over the world. Sign up free on her website.

• A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions.
  If the gifts are deductible, the actual cost of the donation is reduced by your tax savings. For example, if you are in the 33% tax bracket, the actual cost of a $100 donation is only $67 ($100 less the $33 tax savings). As your income tax bracket increases, the real cost of your charitable gift decreases, making contributions more attractive for those in higher brackets. The actual cost to a person in the lowest bracket, 15%, for a $100 contribution is $85. For a person in the highest bracket, 35%, the actual cost is only $65. Not only can the wealthy afford to give more, but they receive a larger reward for giving.
• A contribution to a qualified charity is deductible in the year in which it is paid. Putting the check in the mail to the charity constitutes payment. A contribution made on a credit card is deductible in the year it is charged to your credit card, even if payment to the credit card company is made in a later year.
• Most, but not all, charitable organizations qualify for a charitable contribution deduction.
  You can deduct contributions only if they are made to or for the use of a qualified recipient. No charitable contribution deduction is allowed for gifts to certain other kinds of organizations, even if those organizations are exempt from income tax. Contributions to foreign governments, foreign charities, and certain private foundations similarly are not deductible. Below, you can view a list of organizations for which your donations can be deducted. All organizations rated by Charity Navigator qualify for charitable status, and you can deduct your donations, subject to certain limitations.

  An organization could lose its charity status if it devotes a substantial part of its activities to formulating propaganda or otherwise trying to influence legislation. However, an organization, other than a church, may qualify as a charity and still perform some of these activities by keeping its political expenditures to an “insubstantial” part of its activities. Furthermore, donations to needy individuals are not deductible.

• There are limits to how much you can deduct, but they’re very high.
  For most people, the limits on charitable contributions don’t apply. Only if you contribute more than 20% of your adjusted gross income to charity is it necessary to be concerned about donation limits. If the contribution is made to a public charity, the deduction is limited to 50% of your contribution base. For example, if you have an adjusted gross income of $100,000, your deduction limit for that year is $50,000.

  The rules on 20% limits and 30% limits are way too complicated to delve into in this space. If you are giving to organizations other than those mentioned above, first consult with your tax adviser to determine whether these other ceilings will apply. If you give an amount in excess of the applicable limitation to charity in one year, the excess is carried over for the next five years.

• Rules exist for non-cash donations.
  If you contribute property owned for more than one year, the value of the deduction is normally equal to the property’s fair market value. You have an advantage when you contribute appreciated property because you get a deduction for the full fair market value of the property. You are not taxed on any of the appreciation, so, in effect, you receive a deduction for an amount that you never reported as income.

  You should clearly contribute, rather than throw out, old clothes, furniture and equipment that you no longer use. However, bear in mind the condition of your donated goods. The IRS only permits deductions for donations of clothing and household items that are in “good condition or better.”

  If you bring $1,000 in clothes or furniture to Goodwill or the Salvation Army, make sure that you get a receipt. Never throw such contributions into a bin where no receipt is available. If you are in the 25% bracket, that receipt may be worth $250 in tax savings to you. And remember that the IRS requires a qualified appraisal to be submitted with your tax return if you donate any single clothing or household item that is not in good used condition or better, and for which you deducted more than $500.

• Remember to document.
  No deduction is allowed for a separate contribution of $250 or more unless you have a written confirmation from the charity. A canceled check alone is not enough. If the contribution is to a religious organization solely for an intangible religious benefit (annual dues, for example) written proof is still required. All other contributions of cash require the charity to estimate the fair market value of any goods or services given to you in exchange for your contribution.

  Starting in 2007, the IRS requires written documentation to substantiate deductions for all monetary donations – including cash. In case of an audit, you must have a canceled check, credit card statement or a written acknowledgement from the charity (showing the charity’s name, the date of the donation and the amount given). You will no longer be able to deduct those few dollars you dropped in a charity’s collection bucket without a receipt from the charity to back up your claim.

Remember, it’s always better to give than receive. The glory of charitable donations is that you give and receive at the same time.

Organizations to Which You Can Give and Deduct Your Donation

Your contribution to every organization that Charity Navigator evaluates is tax deductible. If an organization is not evaluated by Charity Navigator, and you still want to support them, you are generally allowed a 50 percent ceiling on your adjusted gross income for contributions if they are any of the following organizations:

1. Churches and other religious organizations;
2. Tax exempt educational organizations;
3. Tax exempt hospitals and certain medical research organizations;
4. A government unit, such as a state or a political subdivision of a state;
5. Publicly supported organizations such as a community chest;
6. Certain private foundations that distribute all contributions they receive to public charities within two-and-a-half months after the end of the foundation’s fiscal year;
7. A private operating foundation which pools all of its donations in a common fund;
8. Certain membership organizations that rely on the general public for more than a third of their contributions.

Learn more about the tax implications of charitable giving in our FAQ.

“A major gift is not something that donors do on a whim or a lark, or on the spur of the moment.  And in all likelihood, they do not materialize without a great deal of time, talent, or effort attached. Making the major gift is a very special expression on the part of the donor, which lets the organization know that the donor believes in the organization 100 percent.”

Laura Fredricks, Developing major gifts: Turning Small Donors into Big Contributors

Tips for Implementing a Major Gifts Program

The good news is that if you are using our fund accounting software, you can rest easy knowing how simple Aplos makes sending out giving statements.  Also, if you are thinking of switching to a simpler fund accounting software, now is the time to change!  Even if you are not a current customer, I hope this list helps keep you organized and sane during this busy season.

1.  Make sure you have all donations entered with current addresses.

2.  Decide what type of letter you want to send to your donors.  Click here for a great resource.  This is a great opportunity to let your donors hear specifically how their contribution made a difference.

3.  Don’t forget to include other types of donations.

4.  See what requirements your organization must meet on the federal, state, and local level.

5.  Start reading the instructions for the Form 990 now.  You might need to research some topics or include information that takes some time to find and organize.

Those are just a few ideas to get you started.  Our desire to support you goes beyond our software so let us know if you need any help!

In the church or nonprofit world, you may not be building an arch, but you are building an organization.  Every decision you make and the results of those decisions come back to you and your ability to steward your leadership well.  People, resources, and finances are just a few of the areas where this weight may feel the heaviest.  At the end of the day, you are responsible and accountability just may be your greatest asset.

If you feel like a giant weight was just thrown your direction, good!  I strongly believe that individual responsibility is beginning to be taken lightly these days.  Greed is a strong force that must be reckoned with on a personal level.   The new Form 990 is evidence that accountability at a greater level is needed.

I recently came across a great article, “Accounting is where the nonprofit buck stops“, posted in Philanthropy Journal, that speaks directly to this issue.  Great insight into the new Form 990 is given as well as the reasons why our government is cracking down. Below is an excerpt from the article.

The new Form 990

Nunn says solid accounting will be critical to provide the additional financial information nonprofits now must report in the new Form 990 they must file with the IRS.

The changes are designed to improve transparency, ensuring that “all information is there and accurate and anyone can access it,” she says, and to promote accountability, ensuring “this board should already have known about what is there, and there should be no surprises.”

Nonprofits, she says, “are holding a huge public trust given to them by government and individuals in society.”

Government recognizes that nonprofits “do work that we or business cannot or should not do,” she says, and in exchange allows nonprofits to operate generally without having to pay taxes, and allows individuals and companies to make contributions for which they can claim charitable deductions on their personal or corporate income taxes.

In return, Nunn says, government and donors expect nonprofits “will do with that money what you said you’d do.”

The new Form 990 requires that “information that is pertinent to this agency is information that can be trusted, that issues have been well vetted, that the board is informed about what is going on,” she says, and that the board has been “presented enough information to make an informed decision.”

I would like to provide (over the next several entries) a step by step process.  My goal is to help you feel prepared to take on this somewhat daunting task so that you and I both maintain our sanity and learn a bit in the process.

Before we begin, below are some important facts to understand.

1.  In order to maintain tax-exempt status, nonprofits, charities, and other tax-exempt organizations are generally required to file Form 990 or Form 990-EZ along with Schedule A with the Internal Revenue Service each year.

2.  Here are the list of forms we will be learning about in order to help you file.  Based on how your own organization is categorized and its contribution reciepts, only some of these forms may be a required.

Before you begin entering transactions here, imagine you were filling out a detailed deposit slip for your bank account with checks listed individually.  The purpose of this section is to do just that – list out the batch of checks (contributions) you would like to deposit.  The batch entry name can be whatever you would like it to be, but you must enter a name for the information to save.

For our nonprofit’s purposes, I simply enter the date I will make the deposit to stay consistent with my bank records, and name the batch according to what purpose the batch serves.  For example, we have contributions that come from various sources – Paypal as well as donor checks.  To differentiate between batches, I might call the batch “Paypal August 30 2010″ and keep the list of donor checks separate with a different batch entry title.  Again, this is how my bank records would show the deposits and makes the most sense for me.  The great thing about Aplos is that you can customize entries according to what makes the most sense for you.

We appreciate individuals, like myself, who come from minimal accounting experience and desire to see them succeed.  Please feel free to email us with any questions you might have regarding fund accounting or specifically Aplos related questions.

I am continuing on the topic of contributions.  My previous post clarified some questions any of us working in the fund accounting world might have. Here are a few more answers to the most asked contribution questions.

Is there a specific form I am suppose to use for contribution statement?

The receipt required does not have to have any certain design, unless, form 1098-C comes into play.  Use Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, when any of these have been donated and valued at more than $500.

When sending a receipt you have various options.  You can send a letter, postcard, a computer genterated form, or even via email.  The important thing to remember is included the information we covered in the last post.

How do I handle non-cash contributions?

A written receipt should be issued for all non-cash donations. Your organization is now responsible for establishishing the value in most cases and should not include any value on the receipt.  An example of a noncash donation receipt can be found here.

What about gifts to pastors or individuals in need?

In most cases, gifts given to pastors or individuals in need do not qualify as chartiable contributions for the sake of tax deduction and would not be included in an annual contribution statement.

An example would be someone who decided to purchase a gift card to a restaurant for the pastor.  While this is a generous gift, a tax deduction cannot be taken by the giver of the card.

How is a love offering (usually in church settings) qualified?

If a love offering is collected for an individual in need, donations would be tax deductible and the offering is not categorized as taxable income to the individual in need, either.

There are a couple of situations where love offerings can be confusing.  The guidelines for love offerings must fall under these criteria in order for the gift to be nontaxable for the individual in need.  The gift needs to not have been solicited, has no service attached, spontaneous in nature, and does not qualify as a tax deduction for the donor.  However, when the congregation acts as a whole, the love offering is usually considered taxable to the minister or guest speaker and tax deductible to the donor.

Remember that contributions are tracked automatically through Aplos.  Look through our website for more information.

Contributions are the foundation upon which your organization operates and exists.  As you know, they play a tremendous role.  Managing them, stewarding them, and accounting for them within the fund accounting framework requires time and organization.  If you are like me, many questions emerge as time goes on.  Below you will find answers to some basic contribution questions.

What are some laws that I need to familiarize myself with regarding donor receipts?

Beginning in January of 2007, the IRS changed the way charitable donations receive tax credit for individuals.  Before that date, your check registers or personal notations were sufficient.  Now all donations require proof of the deductions.  A bank record for this record-keeping requirement includes bank or credit union statements, canceled checks, or credit card statements. They must show the date paid or posted, the name of the charity, and the amount of the payment.

Donors will not be allowed a tax deduction for any individual cash (or property) contribution of $250 or more without receiving a written statement from the church or nonprofit. For more specific information on types of contributions, click here.

What information is required on the documentation sent to donors?

The contribution statement must include the Church’s or Nonprofit’s name, the contributor’s name, the date(s) of the donation(s), and the amount(s).

Also included must be an explanation about whether the charity provided any goods or services to the donor for the donation. If no goods or services were provided, noting such would be important. Include a statement such as the following: “You did not receive any goods or services in connection with these contributions other than intangible religious benefits”.

An annual contribution statement ensures this requirement. Aplos creates one of these automatically for you.

When should I send my annual contribution statement?

Your donors should receive a receipt from you no later than the due date of the individuals’ tax return.

However, I encourage you to issue your receipts by January 31st each year, especially if you issue then on a yearly basis. Be considerate to your donors and give them the information they need to file this portion of the taxes in a timely fashion.

In terms of frequence, your donation receipts or statements can be issued gift-by-gift, monthly, quarterly, annually, or any other frequency. You may decide according to what best suits your organization.

More questions answered on the next post.