Throughout the year, you donate cash, clothing and even furniture to your favorite non-profit organization. But do you know the substantiation requirements for reporting these donations as charitable contributions? Do you need a receipt if you donate more than $250? What if you donate cash or property valued more than $500, or even $5,000? These are important questions to ask to avoid having the IRS deny your charitable contribution deduction. Why does it matter? A recent tax court case demonstrates why having the proper substantiation is so important.
In Smith vs. Commissioner (T.C. Memo. 2014-203), Mr.Smith, the taxpayer, was denied charitable contribution deductions of over $27,000 due to failure to meet the charitable substantiation tests. Mr. Smith had donated $11,730 of furniture from his late mother’s home, $14,487 of clothing and $1,550 of electronic equipment. Mr. Smith filled out various blank receipts, in which he listed general categories of property donated. However, Mr. Smith did not obtain a written acknowledgement from the organization identifying the specific property donated (required for donations greater than $250). In addition, Mr. Smith created a spreadsheet with estimated fair market values, in which he stated that he used the Salvation Army website to determine the values. However, the values used were considerably higher than the website, and Mr. Smith had no proof to support the higher value. The spreadsheet also did not include when and how he obtained the property, or the cost basis of the property (required for donations greater than $500). Lastly, Mr. Smith did not obtain a qualified appraisal for the furniture or clothing (required for donations greater than $5,000). Therefore, the IRS denied Mr. Smith the charitable contribution deduction worth $27,767.
For this reason, it is important that taxpayers meet the substantiation tests when making charitable contributions of cash or property. This article will help you identify what substantiation is required to support your charitable contribution deductions made throughout the year.
For all contribution deductions, substantiation is required to be maintained. A gift of cash, check or other monetary gift, regardless of amount must be substantiated by a bank record or a written communication from the non-profit organization. This documentation, at a minimum, should describe the name of the non-profit organization and the date and amount of the contribution.
For a contribution of cash over $250, the contribution must be validated by a written acknowledgment from the charitable organization stating the exact amount of cash donated. This requirement does not apply if you make smaller contributions throughout the year that total over $250 to the same organization. Additionally, the written acknowledgment can be replaced by a paystub or Form W-2, if the donation was automatically deducted from your paychecks.
Donations of noncash goods have additional requirements. Similar to above, if a noncash donation of $250 was made, a written acknowledgment must be obtained. The acknowledgment must state a description of each item which was donated and whether the organization provided any goods or services in exchange for the donation, and if so, the estimated value of such goods or services.
In order to meet these substantiation rules, written acknowledgments must be obtained before the earlier of the date your tax return is filed, or the due date (including extensions) of your tax return. (Reg.1.170A-13(f))
Donations of noncash goods may require additional filing requirements. When determining if these additional filing requirements apply, you must total all noncash donations for each similar type of property donated during the tax year. This requires you to assign a fair market value to all property donated during the year and group the donations into generic categories such as books, furniture, clothing, toys, etc. All donations made throughout the year are taken into consideration when grouping donations into generic categories even if the donations were made to different charitable organizations. This means if you donated $300 of toys to organization A, and $300 of toys to organization B, the substantiation test for donations over $500 would apply. (Reg. 1.170A-13(c)(7)(iii))
For a deduction of noncash donations greater than $500, you must include a description of the property donated. The description should include an approximate date when the property was acquired, the manner and cost of which the property was acquired, the fair market value when the property was donated and how the fair market value was developed. Several non-profit thrift stores provide a valuation guide for donated goods to assist in establishing the fair market value of the property. This information is listed in your tax return on Form 8283. (Reg. 1.170A-13(b)(3))
An appraisal is generally required for a donation deduction of $5,000 or more of similar type property. The appraisal must be done by a qualified appraiser. For similar type property donated to several different charitable organizations, only one qualified appraisal must be obtained. Similar to the written acknowledgement letter, the qualified appraisal must be completed before the earlier of the date your tax return was filed, or the due date (including extensions) of your tax return. (Reg. 1.170A-13(c)(2))
This information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Please contact our office (603-627-3838) for more information on this subject and how it pertains to your specific tax or financial situation. Howe, Riley & Howe, PLLC would be happy to answer your tax and financial questions regarding these issues or other matters that may be of interest to you or your business.