Giving to charities is an inherent cost of doing business as an independent community financial institution. Aside from the satisfying feeling that comes from helping others, does the charitable giving align with the public relations strategy—does it engage your employees—does it have a measurable impact? Are you choosing the right charity, and is it a qualifying charity? Is it truly charitable giving or a community relations expense?
The IRS has become very strict on compliance with its charitable contribution rules, such as who qualifies as a charitable organization, what can be deducted as a donation, and what documentation needs to be kept. To help clarify what should be classified as a charitable donation, we need to understand the types of qualified organizations.
Qualified vs. Nonqualified
The following types of organizations are generally considered to be qualified organizations:
- A community chest, corporation, trust, fund, or foundation organized under the laws of the United States. The organization must be organized and operated only for charitable, religious, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. Certain organizations that promote amateur sports competition may also qualify.
- War veterans’ organizations, including posts, auxiliaries, trusts, or foundations.
- Domestic fraternal societies, orders, and associations operating under the lodge system.
- The United States or any state, a political subdivision of a state, or an Indian government or any of its subdivisions if your contribution is to be used solely for public purposes.
- Churches, a convention or association of churches, temples, synagogues, mosques, and other religious organizations.
- Nonprofit hospitals and medical research organizations.
- Nonprofit organizations that develop and maintain public parks and recreation facilities.
It is not always clear whether an organization is qualified. If you are not sure, you can search for specific organizations eligible to receive tax-deductible charitable contributions by going to www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-SelectCheck and entering in the name of the organization in question. It can also be helpful to understanding what does not qualify.
Certain types of organizations that are not qualified to receive taxdeductible donations include:
- Civic leagues.
- Social and sports clubs.
- Labor unions.
- Foreign organizations (except certain Canadian, Israeli, and Mexican charities).
- Groups that are run for personal profit.
- Groups whose primary purpose is to lobby for law changes.
- Individuals, such as for scholarships or fundraisers.
- Some community groups.
In general, any money paid to these organizations should be expensed as dues, sponsorships, advertising, or community relations.
Contributions You Can Deduct
Contributions of money or property can be deducted as a donation if they are made to a qualified organization. However, there may be some restrictions on the amount you can deduct if a benefit is received or if you donate property. If you receive a benefit as a result of making a contribution, you can only deduct the portion of the contribution that exceeds the value of the benefit. For example, if you attend a banquet hosted by a qualified organization and pay $100 for a ticket, but the benefit you receive is worth $40, the excess $60 is considered to be a contribution.
There are several factors you need to take into account when determining the amount of a deduction you can take when property is donated. Usually the amount of your contribution deduction is the fair market value of the property at the time of donation. However, if the fair market value of the property being donated is less than your basis in the property, your contribution deduction is limited to the fair market value. The remaining loss is recorded as an ordinary expense. On the reverse side, if you contribute property with a fair market value that is more than your basis, you may have to reduce the fair market value by the amount of appreciation in the property or the amount that would be considered ordinary income if you sold the property at its fair market value. Generally this rule limits your contribution deduction to your basis in the property.
The records you must maintain when you make a contribution vary by the type and amount of the donation.
To claim a cash contribution for a single donation under $250, you must maintain a record of the contribution in the form of a cancelled check or written communication from the charity that shows the name of the charity, the date of the contribution, and the amount of the contribution. For any cash contribution over $250, you must obtain written acknowledgement from the organization that includes the name of the organization, the amount of cash contributed, and a statement that no goods or services were provided by the organization in return for the contribution.
For nonmonetary contributions, the records you must keep depend on the value of the contribution.
Contribution of Less Than $250
For noncash contributions of less than $250, you must get a receipt from the charity showing the name of the organization, the date and location of the contribution, and a reasonably detailed description of the property. You must also keep records showing the fair market value of the property at the time of the contribution and how you figured the value. If the value was determined by an appraisal, you should keep a copy of the appraisal with your records. You should also have on record the cost or other basis of the property.
Contributions of $250 - $500
For contributions of at least $250 but not more than $500, you must maintain the same information you would receive for contributions of less than $250. In addition, the written acknowledgement should indicate if the organization gave you any goods or services as a result of the contribution and a description and good faith estimate of the value of the property donated.
Deductions of $500 - $5,000
For contributions greater than $500 but less than $5,000, you must maintain the same records described for contributions of $250 - $500. Your records should also include the approximated date and how you obtained the property, as well your cost or other basis in the property.
Deductions Over $5,000
For contributions greater than $5,000, you must have the same documentation described for contributions of $500 - $5,000. In addition, you must also obtain a written appraisal of the donated property from a qualified appraiser.
Charitable giving is an amazing way for a financial institution to help build and grow strong community, individual, and business connections. So it just makes sense to understand which organizations qualify, what you can donate for a tax deduction, and how to properly claim the deduction.