Nonprofit clients send thousands of thank-you letters, and two statutes decide whether those letters protect the donor's deduction and whether the organization itself is compliant. Section 170(f)(8) puts the burden on the donor to hold a written acknowledgment for gifts of $250 or more. Section 6115 puts a separate duty on the charity when a payment is partly a gift and partly a purchase. Auditors see the downstream effect in fundraising revenue split between contributions and exchange transactions.
The $250 acknowledgment
Under section 170(f)(8)(A), no deduction is allowed for any contribution of $250 or more unless the donor substantiates it with a contemporaneous written acknowledgment from the charity. The acknowledgment must include, per section 170(f)(8)(B):
- the amount of cash and a description, but not the value, of any property other than cash;
- whether the charity provided any goods or services in consideration, in whole or in part; and
- a description and good faith estimate of the value of any goods or services provided, or, if they consist solely of intangible religious benefits, a statement to that effect.
The IRS guidance on written acknowledgments lists the same content: the organization's name, the amount of cash contribution, a description of noncash contributions, a statement that no goods or services were provided if that is the case, and a description and good faith estimate of any goods or services provided. Under section 170(f)(8)(C), the acknowledgment is contemporaneous if the donor obtains it on or before the earlier of the date the donor files the return for the year of the gift or the due date, including extensions, of that return. Letters sent after the donor files are late.
The quid pro quo disclosure over $75
Section 6115(a) applies when a charity receives a quid pro quo contribution in excess of $75. A quid pro quo contribution is a payment made partly as a contribution and partly in consideration for goods or services provided to the payor. The charity must, in connection with the solicitation or receipt, provide a written statement that:
- informs the donor that the deductible amount is limited to the excess of the money and property contributed over the value of the goods or services provided; and
- gives a good faith estimate of the value of those goods or services.
This is the disclosure printed on gala tickets and auction receipts. It applies even if the payment is under $250. An exception applies to payments to organizations organized exclusively for religious purposes when the donor receives solely an intangible religious benefit generally not sold in a commercial transaction outside the donative context.
Worked example
A charity sells a gala table for $2,000. The table seats 8, and the dinner, wine and entertainment have a good faith value of $120 per seat.
- Value of benefits: 8 times $120, or $960.
- Deductible contribution: $2,000 minus $960, or $1,040.
- Required at solicitation or receipt: the section 6115 statement, because $2,000 exceeds $75, showing $960 as the value provided and the deductible $1,040.
- Required after the event: an acknowledgment under section 170(f)(8), because the payment exceeds $250, showing the same split.
The charity records $1,040 as contribution revenue and $960 as an exchange transaction, subject to the accounting guidance in nonprofit contributions and grants.
A second example: a ticket under $250
A donor pays $180 for a dinner ticket. The meal and entertainment have a good faith value of $60.
- Deductible amount: $180 minus $60, or $120.
- Section 6115 applies, because $180 exceeds $75. The charity must give the written statement with the solicitation or receipt.
- Section 170(f)(8) does not apply, because $180 is under $250. The donor needs no acknowledgment letter under that section, although the charity's section 6115 statement is still required.
Questions that come up
Do several small gifts add up to $250?
No. Under Treas. Reg. 1.170A-13(f)(1), separate contributions of less than $250 are not subject to section 170(f)(8). A donor who gives $100 three times in a year has no acknowledgment requirement for those gifts. Separate contributions of $250 or more to the same charity can be covered by one or more acknowledgments, so a single year-end letter listing each qualifying gift works.
Does a membership count as a benefit?
Often not. The regulation disregards annual membership benefits for a payment of $75 or less per year when they consist of rights the member can exercise frequently, such as discounted admission, or member-only events within the low cost article limits of section 513(h)(2). Benefits of insubstantial value under the IRS revenue procedures are also disregarded. In those cases the letter can state that no goods or services were provided.
What is the penalty for missing the section 6115 statement?
Section 6714 imposes a penalty of $10 for each contribution lacking the disclosure, capped at $5,000 for a particular fundraising event or mailing. No penalty applies if the failure was due to reasonable cause.
Who bears the risk of a late letter?
The donor. The deduction is disallowed without a contemporaneous acknowledgment, so a charity that sends letters after donors file leaves donors without the deduction even though the charity itself faces no penalty under section 170(f)(8).
Common errors in the letters
- The letter states the value of donated property. The statute requires a description only.
- The letter omits the goods or services statement. Even a gift with no benefit needs the sentence saying none were provided.
- The benefit value is the charity's cost, not the good faith estimate of the value to the donor. The regulation defines the estimate as the donee's estimate of fair market value.
- A single letter covers a gift and a separate payment for tickets without splitting them.
What to test in the engagement
- Obtain the acknowledgment templates for gifts, events and auctions.
- Trace a sample of events to the revenue split and to the value-of-benefits estimate.
- Check that acknowledgments for large gifts went out before the typical filing date, and the process for year-end gifts.
- Compare restricted gifts in the letters to the release entries in net asset releases and liquidity disclosures.
- Read the audit requirements in nonprofit audit requirements for how fundraising controls feed the engagement.
- Look at non-cash gifts, where the letter describes the property but not its value.
- Review the fundraising event workpaper for tax-exempt organizations in Form 990 reconciliation.
Sources
- Legal Information Institute, 26 U.S.C. 170(f)(8), Substantiation requirement for certain contributions: https://www.law.cornell.edu/uscode/text/26/170
- Legal Information Institute, 26 U.S.C. 6115, Disclosure related to quid pro quo contributions: https://www.law.cornell.edu/uscode/text/26/6115
- Internal Revenue Service, Charitable contributions, written acknowledgments: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contributions-written-acknowledgments
- Legal Information Institute, 26 CFR 1.170A-13(f), separate contributions, goods or services disregarded, good faith estimate: https://www.law.cornell.edu/cfr/text/26/1.170A-13
- Legal Information Institute, 26 U.S.C. 6714, Failure to meet disclosure requirements for quid pro quo contributions: https://www.law.cornell.edu/uscode/text/26/6714
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