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.

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.

1.  Reimbursement Policies

Keep the process of reimbursing individuals who have made purchases for your organization clean.  Create a document (many can be found by googling “reimbursement request template”), have the individual fill this out and attach the receipt.  I strongly encourage only allowing reimbursment of transactions with a receipt.  As an organization grows, the likiihood that reciepts will be lost and not turned in only has the potential to grow.  Establish this policy from the beginning and keep yourself and others accountable.  Set a specific time each month or week, depending on the number of requests you receive, so that individuals you are reimbursing know when to expect their check.  Also, make sure an individual has the ability to be responsible for the amount of the purchase before you impose on their bank account.  Communication is key here.

2.  Bank Deposits

Establish a weekly routine with entering in your donors information (did I mention Aplos does this in the most efficient manner and tracks your information as well?), their check amount, copying the check for your records, and making your deposit.  You want to be timely and not have checks sit in your inbox for weeks at a time leaving your donors wondering when their check is going to clear.

3.  Entering Contributions from Paypal

Our organization uses Paypal for some of its recurring donations.  These monthly contributions are transferred into our bank account upon our approval.  Just like bank deposits, an established time to enter these donations into our software is needed.  Getting behind here can mean more work later.  We transfer donations twice a month and thus should follow suit with entering them as well.  By entering transactions consistently, we also are able to notify donors of any glitches or clue into missed contributions, if any.

4.  Thank You Notes

Writing thank you notes after donations may seem old fashioned, but I firmly believe your donors needs to hear from you on a personal level.  Keep a system in place that allows you to track whether a note has been written and sent after receipt of a contribution.  Communicating gratefulness for others generosity must never be underestimated.

5.  Upkeep

Because I am considered a volunteer for our own nonprofit, being consistent has proven difficult at times.  Decide on a day or days that work best for your schedule and maintain the block of time set aside for tasks.  Make a schedule for yourself with the tasks that need to be accomplished.  The orderly upkeep of the receipts, deposits, filing, notes, and entering of transactions will possibly prevent disorder and chaos in your organization.  Establishing good habits now will only serve your organziation well in the future as it grows and takes on more responsiblities.

Donation Usability:  Increasing Online Giving to Non-profits and Charities

(Keep in mind that Aplos tracks contributions and makes your fund accounting simple when the time comes to send out contribution statements)

Proper fund accounting procedures are crucial to maintainng your 501(c)(3) status as a church or non-profit.  More specifically, contribution management and the rules defined by the IRS are important to understand, so that your organization’s record keeping not only keeps you accountable, but allows your donor to easily track their tax deductible contributions for the year.  The following article has been modified from the IRS website to help you understand the different types of contributions you may aquire and how to properly categorize them.

Many charitable organizations described in section 501(c)(3) are eligible to receive tax-deductible contributions in accordance with section 170. Most eligible organizations are listed in Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.

Quid Pro Quo Contributions

A charitable organization must provide a written disclosure statement to donors of a quid pro quo contribution in excess of $75. A quid pro quo contribution is a payment made to a charity by a donor partly as a contribution and partly for goods or services provided to the donor by the charity. For example, if a donor gives a charity $100 and receives a concert ticket valued at $40, the donor has made a quid pro quo contribution. In this example, the charitable contribution portion of the payment is $60. Even though the part of the payment available for deduction does not exceed $75, a disclosure statement must be filed because the donor’s payment (quid pro quo contribution) exceeds $75. The required written disclosure statement must:

1. Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the value of goods or services provided by the charity, and

2. Provide the donor with a good faith estimate of the value of the goods or services that the donor received.

The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the organization to provide another statement when the associated contribution is actually received.

No disclosure statement is required when:

1. The goods or services given to a donor meet the standards for insubstantial value

2. There is no donative element involved in a particular transaction with a charity (for example, there is generally no donative element involved in a visitor’s purchase from a museum gift shop); or

3. There is only an intangible religious benefit provided to the donor. The intangible religious benefit must be provided to the donor by an organization organized exclusively for religious purposes, and must be of a type that generally is not sold in a commercial transaction outside the donative context.

A penalty is imposed on a charity that does not make the required disclosure in connection with a quid pro quo contribution of more than $75. The penalty is $10 per contribution, not to exceed $5,000 per fund-raising event or mailing. The charity can avoid the penalty if it can show that the failure was due to reasonable cause.

“Regular” Contributions

Under a new recordkeeping rule effective for all cash, check, electronic funds transfers, credit card charges, or other monetary contributions of any amount made in taxable years beginning after August 17, 2006, the donor must obtain and keep a bank record or a written communication from the donee as a record of the contribution. (Hint: Aplos automatically tracks your donors and creates contribution statements for you!) Written records prepared by the donor (such as check registers or personal notations) are no longer sufficient to support charitable contributions. Bank records for this recordkeeping requirement include 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. Taxpayers who claim charitable contributions made by payroll deduction can satisfy the recordkeeping requirement if the donor has (1) a pay stub, W-2, or other document furnished by the employer that states the amount withheld for payment to charity, and (2) a pledge card other document prepared by or at the direction of the charity that shows the name of a donee.  An organization described in section 170(c), or a Principal Combined Fund Organization for purposes of the Combined Federal Campaign, will be treated as a donee organization for purposes of the new recordkeeping provision.

A donor claiming a deduction of $250 or more is also required to obtain and keep a contemporaneous written acknowledgment for a charitable contribution. To be contemporaneous the donor must generally obtain the written acknowledgment no later than the date the donor files the return for the year the contribution is made. The written acknowledgment must state whether the donee provides any goods or services in consideration for the contribution.  If the donee provides goods or services to the donor in exchange for the contribution (a quid pro quo contribution), the written acknowledgment must include a good faith estimate of the value of the goods or services. The donee is not required to record or report this information to the IRS on behalf of a donor. The donor is responsible for requesting and obtaining the written acknowledgement from the donee. Although there is no prescribed format for the written acknowledgment, it must provide sufficient information to substantiate the amount of the contribution. For more information, see Publication 1771.

The contemporaneous written acknowledgment may be contained in the same document as the written communication from the donee used to satisfy the new cash recordkeeping requirement, as long as it contains all information required by both the recordkeeping requirement and the contemporaneous written acknowledgment requirement.

Appraisal Needed

For claimed contributions over $5,000, generally a qualified appraisal prepared by a qualified appraiser must be obtained.  For appraisals prepared in connection with returns or submissions filed after August 17, 2006, see Notice 2006-96.

Household items and clothing contributed to charity after August 17, 2006 must be in at least good used condition to be deductible.  This requirement does not apply to contributions of food, paintings, antiques, other art objects, jewelry and gems, or collections, and does not apply to a contribution of an item for which a deduction of more than $500 is claimed if the taxpayer obtains a qualified appraisal of the item.

(Information available on the IRS Website Under Charities & Non-Profits)

Because 501(c)3 status approval may take a few months, I thought it might be helpful to clarify some terms.  I found a great question posed by “Nonprofit and Church Law Ministries, Inc.” a nonprofit, 501(c)(3) organization, whose purpose is to provide current, practical information to churches and small and mid-sized religiously oriented exempt organizations on legal and financial developments that could affect them.

Can an organization advertise itself as a nonprofit, but not be a 501(c)(3) organization?

Yes.  Nonprofit is a concept of state law, which means that surplus revenue cannot be distributed to owners or other insiders. When we say “nonprofit” we usually think of federally tax-exempt organizations, but Section 501(c) of the Tax Code, which describes most, but not all, exempt organizations, now lists 28 separate types of organizations that are tax exempt.

The largest class of nonprofits by number is 501(c)(3) charities, but the IRS statute also includes (c)(1) groups like federal credit unions, (c)(4) civic associations, (c)(5) unions or agricultural associations, (c)(6) trade or business associations, (c)(7) social clubs, various fraternal organizations, veterans’ organizations and a lot of others. These are nonprofit organizations which corporate revenue is not taxable but only c3 and churches are not only tax exempt but also tax deductible in that they can give tax deductions for contributions to the organizations.

One of the primary benefits of being tax-exempt under IRC Section 501(c)(3) is the ability to accept *contributions and donations that are tax-deductible to the donor. Additional benefits include, but are not limited to: