As donors and their advisors rush to close year-end charitable gifts, it is easy to overlook the very precise requirements for income tax deductibility. Donors who fail to follow these rules may find their entire deductions disallowed due to avoidable problems with the accompanying paperwork. Tax advisors should pay close attention to final regulations the U.S. Treasury Department issued this year on substantiating charitable contribution deductions.
Proof Required. For gifts of less than $250, the donor needs only a receipt from the charity, a bank record or, for a noncash gift, other reliable records. For gifts of $250 or more, the donor must have a contemporaneous, written receipt from the charity. No particular form or format is required, but the receipt must include the charity’s name, the gift date and a description of the property given. The final regulations confirm that charities can provide these receipts by email.
The receipt also must state whether the charity furnished significant goods or services in return for the gift. If so, for gifts of more than $75, the receipt must describe those goods or services, estimate their value, and remind donors that they may deduct only the amount by which their gift value exceeds the value they received in return. The charity can ignore certain insignificant or low-cost items it provides as thank-you gifts.
A noncash gift between $500 and $5,000 requires not only a receipt but also an IRS Form 8283 that lists information about the property’s acquisition date, price and condition. A noncash gift of more than $5,000, or $10,000 if closely held stock, must be appraised by a qualified independent appraiser. The appraiser cannot be (i) a party to the gift transaction or to the earlier transaction in which the donor acquired the property or (ii) someone with a close business or family relationship with the donor or another party. The appraiser also must meet minimum education and experience requirements, which become stricter under the final regulations for gifts after 2018.
The appraiser must sign the Form 8283 that accompanies the donor’s return. For noncash gifts of $500,000 or more, and for gifts of artwork with a total value of $20,000 or more, the donor must submit the entire signed appraisal report with the income tax return.
Multiple Gifts. These thresholds apply differently to cash and property gifts. Cash gifts are not added together but are viewed independently, so a donor can use canceled checks to document three $100 gifts to one charity even though a single $300 gift would need a contemporaneous receipt from the charity. In contrast, noncash gifts of similar items are considered together, so a donor who gives books worth $2,000 to each of three libraries would need a qualified appraisal of the books even though no single library received a gift that exceeded the $5,000 appraisal threshold.
Out-of-Pocket Expenses. Donors may deduct reasonable expenses they incur in charitable activities, but anyone who claims a deduction of $250 or more for expenses must have not only credit card receipts and other records confirming the expenses incurred but also a contemporaneous receipt from the charity that acknowledges (but need not value) the donor’s activity.
Due Dates for Receipts and Appraisals. A receipt is contemporaneous only if the donor obtains it before filing the return that claims a deduction for the gift or, if earlier, before the return is due. The IRS and courts will disregard a receipt obtained later and disallow all related deductions. They also will disregard an appraisal that (i) is made as of a date more than 60 days before the actual gift or (ii) is obtained after the return due date.
Carry-Over Deductions. Some donors cannot claim their entire deduction in one year due to the annual percentage limits on deductible gifts. For any deductions carried over for use in future years, the donor must submit copies of the Form 8283 appraisal summary and/or qualified appraisal with each subsequent year’s return on which a carry-over deduction is claimed.
Incomplete Receipts. A charity’s receipt must describe the property given, but it need not (and probably should not) assign a monetary value. If the charity furnished significant goods or services in return, the receipt must both describe them and provide a good-faith estimate of their value. A blank pledge form filled out by the donor will not qualify because it does not answer the goods-and-services question. A blank receipt form will not support a non-cash gift if the donor does not adequately describe the condition of the gift property. If a receipt fails to include all of the required elements, the IRS will disallow the donor’s entire deduction.
Recent Causes of Lost Deductions. The IRS enjoys remarkable success in defeating claimed deductions solely on the basis of faulty paperwork. For example, no deduction was allowed in any of the following situations:
- The donor, the sole officer of a small charity, failed to write herself a receipt for a contribution that also was evidenced by canceled checks.
- The donor failed to obtain a qualifying receipt until after the IRS began auditing her return.
- The donor signed a deed reciting that he had received “good and valuable consideration” for a land gift, even though the charity’s receipt confirmed he actually received nothing in return.
- To save fees, the donor, a licensed real estate appraiser, submitted his own appraisal of land given rather than using an independent appraiser.
- The donor gave his membership interest in a limited liability company that owned a building, but he submitted an appraisal of only the building and not the LLC interest he actually gave.
- The appraisal report omitted one or more of the 11 elements tax regulations require for a qualified appraisal.
- The appraisal summary failed to disclose what the donor paid for the gift property.
Valuation Penalties. In addition to disallowing deductions on technical grounds, the IRS can penalize a donor severely for a significant misstatement of gift value. If the claimed value exceeds the actual value by at least 150 percent, the penalty is 20 percent of the resulting underpayment of the donor’s tax liability. The penalty for a valuation difference of 200 percent or more is 40 percent of the underpayment.
To comply with these technical rules and preserve available deductions, donors should document each gift carefully when made. They should closely recheck receipts, appraisals and other records against the legal requirements before filing the return on which they first claim the deduction. Close attention to detail before making a gift and before filing the return can assure that donors will receive all available tax benefits for their gifts.