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Nonprofit Help Desk FAQ: The Who, When and How of Thanking Your Donors

by Molly O'Connell

‘Tis the season of giving thanks, and in honor of that, this month’s Nonprofit Help Desk FAQ is focused on 3 of the most common questions we hear related to gift substantiation and donor acknowledgement.

Do I have to send a thank you to all donors?

Legally, no, but a nonprofit should thank every donor, regardless of the size or type of the donation, and, as described on page 3 of IRS Publication 1771, it is a best practice which donors expect.  These are people who share a passion for your mission and your thank you process is a key opportunity for building relationships which are critical to your nonprofit’s long-term success.

Legally, the rules break down as follows:

  • Before claiming a charitable tax deduction, the donor is responsible for obtaining a contemporaneous written acknowledgement from any charity to which s/he gave a single contribution of more than $250. While the definition of “contemporaneous” allows leeway, nonprofits should aim to acknowledge donations promptly throughout the year, and no later than January 31 of the year following the donation.
  • If the donor received goods or services in exchange, different rules may apply – see the next question.
  • Certain non-cash donations, such as property or vehicles (motor vehicle, boat, or that spare airplane that was hanging around his or her backyard) are subject to slightly different rules, which you can learn about in IRS Publication 4302 and IRS Publication 561 respectively. IRS Publication 1771 provides sample written acknowledgements for non-cash donations.

If we give donors a thank you gift, how does that change things?

This is called a “quid pro quo” donation. A nonprofit must provide a written disclosure to any donor who receives goods or services in exchange for a single payment in excess of $75, and this acknowledgement must include a good faith estimate of the goods or services, and the donor must generally reduce his or her charitable deduction by this amount.

There are exceptions to this, including the “token exception” (for insubstantial goods or services – think logo covered mugs),  membership benefits exception, and intangible religious benefits exception, all of which are defined on page 5-7 of IRS Publication 1771.

A nonprofit has no responsibility to state what amount is deductible by the donor, and in fact should leave that to the donor and/or his accountant, but must document what was received by both parties.

We recently held an auction as a fundraiser. How do we thank donors of the goods for sale versus the donors who purchase those goods during the auction?

 

All deserve recognition as supporters of your mission, but in terms of substantiating donations for tax purposes:

Individuals who purchase items at a charity auction may only claim a charitable contribution deduction for an amount paid in excess of the item’s fair market value. Nonprofits should ask the donors of items to provide a good faith estimate of their value, and auction best practice is for the host nonprofit to prominently disclose to all attendees these estimates before or during the bidding process. Nonprofits should provide a written acknowledgement to winning bidders identifying the purchase price, the estimated fair market value of the item, and must inform the donor that the deductible contribution is limited to the excess of the money paid for the item over the fair market value of the goods or services provided.

Donors who provide goods for charities to sell at an auction are treated a little differently. The sale of that item is considered unrelated to a charity’s exempt purpose, even if the sale raises money for the charity to use in its programs, and this limits how a donor may take a charitable deduction. Additionally, the donation of services is never deductible.  See the IRS’s page on charity auctions for more information.  Again, it is not the charity’s responsibility to determine the amount a donor may deduct, but the thank you letter to the donor should include a detailed description of the donated item(s) and a notice such as, “The amount which you may claim as a charitable deduction for this donation may be limited by IRS rules.  Please consult with your accountant.”

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