Knowing WHEN to issue contribution receipts is something every organization that accepts donations should research. Knowing when NOT to issue those charitable contribution receipts may be even more important!
For example, one of my clients called me a couple of days ago and ask me to set up some new accounts in their COA (chart of accounts) because they were starting a new fundraiser and wanted to track income and expenses out of it.
They had started a "club" in which donors were automatically entered into a weekly cash drawing. A great fundraiser...but I had to explain to her that all of the donations big or small were NOT tax deductible and she would have to let the donors know that they would not be receiving a contribution receipt for their donations.
In IRS Pub 526, it states: "You can't deduct as a charitable contribution amounts you pay to buy raffle or lottery tickets or to play bingo or other games of chance."
Even though they were not calling it a raffle or lottery...it was still a gift with a "chance" to win some money...so none of the amount given is tax deductible for the donors.
More "donations" mentioned in that IRS publication that are not eligible for (tax deductible) contribution receipts are:
some or all membership fees or dues.
tuition or amounts you pay instead of tuition. You cannot deduct any fixed amount you must pay in addition to, or instead of, tuition to enroll in a private school, even if it is designated as a “donation".
Contributions to a retirement home for room, board, maintenance, or admittance.
The general principle here is if your donor "will receive or expect to receive a financial or economic benefit as a result of making a contribution to a qualified organization, they can't deduct the part of the contribution that represents the value of the benefit you receive." None of the donations given for raffles or any other games of chance are deductible!
While I'm on a roll here telling you what is NOT considered tax deductible contributions...let me add some more:
According to Richard Hammar (the BEST church and tax accounting expert in the US ...in my humble opinion =):
You cannot give a contribution receipt for a discount. Often businesses will give churches discounts on their merchandise. Some will then turn around and ask your church for a donation receipt for the difference between the price they let the church pay and what they normally sell their product for. Discounts are not tax deductible.
The IRS does not permit a tax deduction for donated labor or services. However, a donation receipt may be issued for donated materials and other out-of-pocket expenses. See this page on Contribution Receipt Rules for more details.
The value of rent-free building space donated for a church is not tax deductible.
Another type of contribution that gets sticky is earmarked contributions. For example... an individual gives a contribution designated to your benevolence fund…but makes the stipulation that it is to go to a specific needy individual in the church. That contribution would not be tax deductible to the donor and would not be included in their contribution receipt. Your church must have complete control over the contribution!
See how to receive, record, and acknowledge contributions per IRS guidelines in my book:
There may be an exception to that rule such as when the contribution is to foreign missionaries under the control and supervision of the church. The contribution may not be made out the church BUT it is made “for the use” of the church. See this article by the MinistryCPA - Corey A. Pfaffe, CPA, LLC: Designated Gift to a Missionary.
Now on to the how...
Church Accounting Package
A set of 4 ebooks that covers the following topics...
All contributions must have proof of the deduction to be tax deductible.
If a single contribution is smaller than $250, the proof may be either a bank record or a donation receipt.
A bank record for this record-keeping requirement includes bank or credit union statements, canceled checks, or credit card statements.
For single contribution of $250 or more the donor must obtain a contemporaneous, written acknowledgment of the contribution from the recipient organization. (IRS Publication 1771)
The recipient organization can either issue single charitable contribution receipt for each contribution of $250 or more, or you can attach an itemized statement to the donor's annual contribution statement which includes all of the donor's tax deductible contributions.
A contribution receipt must include the Church's or Nonprofit's name, the donor's name, the date(s) of the donation(s), and the amount(s).
It must also contain a statement explaining whether the charity provided any goods or services to the donor for the donation. If no goods or services were provided, you would include wording such as:
"You did not receive any goods or services in connection with these contributions other than intangible religious benefits".
A written receipt should be issued for all non-cash donations.
Usually, your organization is not responsible for establishing the value
of the noncash items and should not include any value on the receipt.
Make sure your noncash donation receipt includes:
Name of church
Description of donated item but remember we are not appraisers so do not include a value. Donors are responsible for determining value. Can be done by consulting their CPA or using fair market value as outlined in IRS publication 561 Determining the Value of Donated Property
Statement such as: “You did not receive any goods or services in connection with this contribution other than intangible religious benefits".
Important: a new tax law adopted in 2004 requires extra documentation from your organization for contributions of qualified vehicles (including automobiles, boats, and airplanes).
There are also some strict regulations for contributions of property valued over $500 and even more requirements for contributions of property valued over $5,000.
These laws are complex so for detailed instructions...look on the IRS website or purchase my book: Church Contributions.
Number One Rule when sending out contribution receipts:
Make sure name and address of donor is correct!
Sending Contribution Receipts:
Receipts or acknowledgments can be issued gift-by-gift, monthly, quarterly, annually, or any other frequency your church decides.
However, most churches send out annual contribution receipts on or before January 31st of the following year.
Before you send them out, you should provide some sort of written communication to your donors regarding your timeline and that they should not file their taxes until they receive all contribution receipts for the tax year to ensure all their contributions were deductible.
You could do this by posting a notice on the bulletin board, sending out a letter, including in newsletter, posting on church web site, etc.
Donors must give their contribution checks on or by December 31st to be included in that year’s written acknowledgement of their contributions.
If it comes in the offering on or after January 1st…even if the check was backdated for the year before …it would not be included in that year’s annual contribution letter.
However, if comes through the mail and is received by your church on or after January 1, but check(s) is dated AND postmarked on or before December 31…it would be deductible and included in their annual contribution statement.
Church and Clergy Tax Guide written by Richard Hammar J.D., LL.M., CPA