Strict Compliance On Charitable Donation Tax Deductions. As 2022 draws to a close, plenty of people—both in private and in public—are considering giving to charity. Given recent court judgments creating “strict criteria” to claim tax deductions for charitable donations, donors must be informed of the exact rules in order to avoid losing considerable tax benefits. Additionally, in order to ensure compliance with federal tax law and to prevent making it difficult for contributors who are seeking to claim these deductions, it is crucial for organizations that accept contributions to evaluate their gift receipt and reporting methods. Read more: Daniel H. Cole
Within the tax year, donations to recognized charities may be written off. An organization must satisfy the standards of Section 501(c)(3) of the Internal Revenue Code and possess a letter from the IRS confirming that it is exempt from federal income tax in order to be eligible (3).
To be eligible for a tax deduction, donors must maintain paperwork that lists the name of the recipient organization, the date of the gift, and the donation amount. A bank statement or a letter from the beneficiary organization might serve as this documentation. The following list of additional requirements for a charitable deduction changes depending on the size of the gift.
Any contribution of more than $250 must be accompanied by written confirmation of the donation from the beneficiary organization, often known as a charity receipt. A receipt may take the shape of a handwritten letter of gratitude, an electronic message of appreciation, or a report on contributions made each year. No of the format, the receiving organization must include the following information on each receipt it issues:
The amount of money given
An explanation of any non-cash contributions (but not their value)
An indicator of whether or not the charity exchanged donations for products or services. (The acknowledgment sheet can state, for instance, “No goods or services were provided in return for this gift.”)
The receipt must list any goods or services provided by the organization and estimate their fair market value. This happens often when a nonprofit hosts a gala or banquet and solicits contributions to cover the cost of the meal and generate money for the organization. To avoid any queries from donors or the IRS, all organizations should review their receipting procedures to ensure they adhere to these rules.
To satisfy the donor’s requirement to keep track of these data for tax reasons, the majority of receivers of contributions also include the date and amount provided on the receipt. Before the earlier of (1) the date the tax return is due (including extensions) for the tax year in which the contribution was made or (2) the date the tax return is filed the donor must have the receipt in their possession.
Earlier this year, the U.S. Tax Court determine that it was inappropriate to deduct charitable gifts for which there was no contemporaneous written recognition such as a receipt. Taxpayers in Albrecht v. Commissioner, T.C. Memo. 2022-53 executed a deed of gift and donated a piece of their collection of Native American jewelry to a museum. If the contributors got any in-kind advantages from the museum, it was not specified in the donation deed. Because the deed of gift did not explicitly state that it was the entirety of the parties’ agreement and the museum did not provide the taxpayers with a separate receipt, the court determined that the taxpayers did not “satisfy the strict requirements” of Internal Revenue Code section 170 and were not, therefore, entitled to a deduction for their donation. It’s important to note that the IRS disallowed the whole deduction despite the fact that no one disputed the taxpayers’ good intent in making a charitable donation. Also, read: 6 Steps to Create a Personal Budget – The Ultimate Guide
Additional Conditions for Donating Real Estate
Additional paperwork is need for tax deduction purposes when the value of the donate item—including any virtual money exceeds $500. The IRS Form 8283 Noncash Charitable Gifts must be submitte by the donor and attache to their tax return in order for noncash charitable contributions (i.e., those value at more than $500) to qualify as a deduction. You only need to complete Section A of Form 8283 if you’re giving away property valued at more than $500 but less than $5,000.
The donor must complete Section B of Form 8283 and get a certified record appraisal if the value of the give property excee $5,000. In Section B of Form 8283, the donor must fill out all required areas. The correctness of the donor’s declaration of the property’s description, fair market value as of the date of donation, acquisition date, acquisition method, and cost or adjusted basis is very important to the Internal Revenue Service (IRS). The cost or adjusted basis of a donor is often lower than the fair market value, and if the donor does not disclose the right cost or adjusted basis, the IRS may attempt to deny a deduction. On Form 8283, the competent appraiser and the receiving organization must both sign the donation.
The donor should simply affix the qualifying appraisal to Form 8283 and have it on hand for contributions of property valued at more than $5,000 but less than $500,000. Having said that, you must submit the qualified appraisal with Form 8283 together with your tax return if you’re claiming a deduction for a carryover contribution from a prior year.