Most nonprofits know the tax law requires them to state the value of benefits provided to the donor and the deductible portion of a gift when a donor receives a benefit from the nonprofit in return for the donor’s contribution. However, many nonprofits struggle with how to determine the value the benefit provided. In this post, we attempt to clarify this confusing topic.
A. General Duty to Substantiate Contributions.
Nonprofits have a general duty to acknowledge charitable gifts whenever a donor makes a contribution in excess of $250 or more; however, most consider it a best practice to acknowledge smaller gifts as well. A proper acknowledgment may be in any form, including email, but must contain the following elements:
- the exact amount of cash or a description of any property other than cash contributed by the donor;
- whether the nonprofit provided any goods or services in consideration for the gift, in whole or in part; and
- a description and good faith estimate of the value of any such goods or services provided by the nonprofit to the donor.
The nonprofit should not estimate the value of a donor’s non-cash contribution. The nonprofit is under no obligation to appraise the value of a contribution and should not attempt to do so. The burden of valuing the contribution rests solely on the donor. The nonprofit should simply thank the donor for their contribution by providing them with an acknowledgment containing only the information above and leave determining the contribution’s value to the donor.
B. Additional Duty to Substantiate Quid Pro Quo Contributions.
A quid pro quo contribution is one where the nonprofit provides a benefit, right, or privilege to the donor in partial consideration of any contribution of $75 or more. When a quid pro quo contribution occurs, the nonprofit must provide a written disclosure statement (the “Disclosure”) to the donor that:
- provides the donor with a good faith estimate of the fair market value of the goods or services provided by the nonprofit in exchange for the contribution; and
- informs the donor that only the amount of their payment in excess of the fair market value of the benefit is a deductible charitable contribution.
To value the quid pro quo benefit, the Treasury Regulations state nonprofits must (a) use any “reasonable methodology” to estimate the value and (b) apply the methodology in good faith. For goods or services not commercially available, the nonprofit should look at the fair market value of “similar or comparable” goods or services. The Treasury Regulations further provide that the unique qualities of the goods or services being valued need not be shared by those used for comparison. The Treasury Regulations provide several examples that explain how nonprofits may value the use of facilities, goods or services offered commercially, and celebrity presence.
- Use of Facilities. If the use of the nonprofit’s facility is not generally offered commercially, the nonprofit should look to the cost charged by hotels, conference nonprofits, or other facilities in the community offering space with similar capacity, amenities, and atmosphere. The presence of unique features, art, or exhibits at the nonprofit do not impact whether the other facility is considered similar.
- Goods or Services Offered Commercially. If the nonprofit offers a good or service commercially, then the value of that good or service is equal to what the nonprofit normally charges.
- Celebrity Presence. The presence of celebrities or any other significant person, does not alter the value of a good or service not otherwise offered by the nonprofit commercially.
When the nonprofit is valuing a benefit provided to the donor, it must assess the value of what the donor accepted, not the expense actually incurred by the nonprofit for providing the benefit. Thus, donors can be given the option to reject various benefits to increase the deductible portion of their gift.
C. Exceptions to the General Rule: Contributions with Insubstantial Benefits to the Donor.
A contribution will be fully deductible even if the donor receives goods or other benefits in return, so long as the benefits conferred on the donor are insubstantial or incidental. If the nonprofit determines it is providing only insubstantial benefits in return for the contribution, it must include the following statement in its fundraising materials:
“Under Internal Revenue Service guidelines the estimated value of [the benefits received] is not substantial; therefore, the full amount of your payment is a deductible contribution.”
Benefits received by a donor are considered insubstantial where:
- the fair market value of all the benefits received does not exceed the lesser of 2% of the contribution or $105.00 (2015 inflation adjusted number);
- the only benefits received by the donor during the year in return for a contribution of $52.50 or more have an aggregate cost of not more than $10.50 (2015 inflation adjusted number);
- the charitable solicitation is accompanied by free, unordered items and the aggregate cost of such items distributed to any single patron in a calendar year is not more than $10.50 (2015 inflation adjusted number);
- the benefit is a non-commercial quality publication, not available to nonmembers, the primary purpose of which is to inform members about the nonprofit’s activities;
- the benefit is intangible recognition like having a room named after a donor or having one’s name on a donor list is, as a general rule, incidental and tenuous and does not reduce the donor’s deductible contribution; and
- the benefits are frequently exercised membership rights and privileges offered to members in consideration of $75 or less per year such as free or discounted admission or parking, and discounted or preferred access to goods or services. “Frequently” is defined by examples of what is not “frequent.” For example, the IRS tells us that tickets to eight shows is not frequent and cannot be disregarded.
Nonprofits should periodically review the benefits provided to donors and determine those that must be valued and those that fall into one of the exceptions. Benefits that must be valued should be reassessed annually to ensure the value assigned is reasonable based on current comparables.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide. If you are seeking legal advice, contact firstname.lastname@example.org for information about our services.