January 2008 Newsletter

11 Rules for Deciphering IRS Rules on Disclosure

This month’s article is reprinted with permission from Rhonda G. Williams, CPA, a Senior Tax Manager for Barraclough & Associates, PC in Santa Fe, New Mexico.

RULE #1 – A cash donation is money (cash, credit card, or check) the organization receives directly. A noncash donation is anything else the organization receives (stock, automobiles, artwork, furniture, clothing, volunteer services, free rent, etc.).

RULE #2 - The donor acknowledgement for a cash donation must state the amount donated. A noncash donation acknowledgment must include a detailed description of the item donated, but never a value. The acknowledgment must also state the date the donation was received.

RULE #3 – The income your organization records as income for noncash donations (tangible goods, services, or use of space for free or below market value) for book purposes is the value of the donated item as determined by your organization, which may or may not be the same as the value claimed by the donor. Only donated tangible goods are reported as income for tax purposes. Donated services or use of facilities or other items are never reported as income for tax purposes (though this amount is reported for informational purposes only at Question 82b on Form 990). See RULE #8 for the exception.

RULE #4 – Items that are donated for charity auctions are reported as income at their fair market value per RULE #3. This amount becomes its cost basis upon sale or disposal. The donor receives a donor acknowledgement for a noncash donation as noted in RULE #2 above. The organization has no responsibility to report the item’s sale price to the donor. However, this information can be provided as a courtesy as long as the letter is worded in such a way that it cannot be misconstrued as a donor acknowledgement letter. See RULES #9 and #10 for the exceptions.

RULE #5 – The sale of auction items provides fundraising income that is reported as special event income on the Form 990. The cost basis of the items sold (see RULE #4) is reported as special event expense. The difference between the sale price and the cost basis becomes part of the calculation of total gain or loss on the special event. If this difference is substantial, the organization should double-check its original valuation. If the organization determines that the value was correct, the books should remain as is.

RULE #6 - The organization has no responsibility to provide additional information to the purchasers of items at a charity auction. The government’s position is that the value of the item purchased is the amount the buyer was willing to pay for it and, therefore, no part of the purchase price is a charitable deduction. If a buyer believes he paid more for an item than it was worth and that the difference is deductible by him as a charitable contribution, it is his responsibility to document that position in case of an audit.

RULE #7 – Quid pro quo is the term used to describe a payment that is part donation and part value for the benefit the buyer received and often applies to special events (dinners, dances, concerts, etc.). The organization must determine the value of the goods and services provided to the buyer in exchange for his payment, which is nondeductible, and the amount of the payment that was deductible as a charitable contribution. The value of the goods and services received is the price someone would pay if they purchased them outside of a charitable fundraising event. The actual cost to the organization of those goods and services and whether they were donated to the organization or purchased by it is irrelevant. The IRS can assess penalties if this information is not provided.

RULE #8 - The value of donated services or the use of facilities or other items for free or less than fair market value is not deductible by the donor if the donor himself provides the services, facilities, or items. Also, a person who donates a self-created tangible item (for example, a painting) cannot take a tax deduction for the value of that item. In both cases the donor has not suffered an economic loss because foregone income (either from rent or the sale of the sale of painting) is not a loss.

However, if the donor purchased the items that are being donated, the donation is deductible to the extent of the cash paid by the donor and it is the donor’s responsibility to keep proper documentation in case of audit. For example, if a masseuse donates a gift certificate for a free massage, he will not be able to take a tax deduction if he or his business is providing the massage. If, however, a person buys a gift certificate for a massage and donates it to the organization for its auction, that person can deduct the amount paid for the gift certificate because he has suffered an economic loss, in this case, the cash used to purchase the gift certificate. By the same token, someone who is in the business of buying and selling art can take a deduction for the cost of the artwork he donates, but not the value, because the extent of his economic loss is what he originally paid for the artwork.

The above information regarding noncash donations has no effect on the type of acknowledgement the donee organization is required to provide per RULE #2. It is being provided merely to explain and highlight the reasons why the organization cannot and should not state a value for noncash donations. It would be impossible for an organization to obtain and interpret the information it would need in order to take responsibility for the amount of a donor’s tax deduction.

RULE #9 – Special rules apply to noncash donations greater than $5,000. A donor must file Form 8283 to report noncash donations greater than $500. If the claimed value of the donated item or group of similar items exceeds $5,000, the donee organization must sign Part IV acknowledging receipt of the property, the date it was received, and whether or not the organization is going to use the property for an unrelated use. Fraudulently identifying an item as being related to your organization’s exempt function, knowing that it was not intended for such use, can result in a $10,000 penalty. Also, your organization cannot fill out any part of the form except Section B, Part IV and cannot fill out that section unless Section B, Parts I and III have already been filled out by the donor and appraiser. The donee organization must keep a copy of form 8283 in its files for at least three years. If the item acknowledged by your organization on Form 8283 is sold, exchanged, or otherwise disposed of within three years after the date of receipt, you must file Form 8282 within 125 days. The original is filed with the IRS and the donor is provided with a copy. There are two exceptions to the Form 8282 filing requirement. First, the form does not have to be filed if the original Form 8283, Section B, Part II, had been signed, and the item that was disposed of was among those listed in this section as being appraised at $500 or less. If the original Form 8283, Section B, Part II, contained more than one item, this exception only applies to those items that were clearly identified. Second, the organization does not have to file Form 8282 if an item is consumed or distributed, without consideration, in fulfilling its purpose or function as a tax-exempt organization. The penalty for failure to file Form 8282, if required, failing to file the form by the due date, or failure to include all of the required information, is currently $50.

RULE #10 – Special rules apply to qualified vehicle donations. A qualified vehicle is any motor vehicle manufactured primarily for use on public streets, roads, and highways; a boat; or an airplane. If an organization receives a qualified vehicle as a donation, it can use Copy B of Form 1098-C as the acknowledgment. The acknowledgment must be provided to the donor no later than 30 days after the date of the sale of the vehicle or the date of the contribution. The date of sale is used if the vehicle was sold in an arm’s length transaction to an unrelated party and the sales information must be reported in boxes 4a, b, and c. The date of the contribution is used if the vehicle will not be sold by the donee organization before completion of a material improvement or significant intervening use, or the vehicle will be given or sold to a needy individual for a price significantly below fair market value in direct furtherance of the organization’s charitable purpose of relieving the poor and distressed or underprivileged who are in need of transportation. No value is reported and box 5a and c or 5b must be checked.

RULE #11 – Stock donations are simply noncash donations subject to RULE #2 and RULE #3. However, for some reason it is a major area of misunderstanding for many organizations. Stock that is donated to an organization is a noncash donation that is booked at its value on the date of the donation and is reported as a noncash donation on the Form 990. It is the donee’s responsibility to acknowledge the receipt of “500 shares of ABC Corporation stock on January 1, 2XXX.” It is the donor’s responsibility to determine the amount of his or her tax deduction. Many organizations record the stock donation on the date it is sold, state a value in the acknowledgment letter, and/or consider the donation to be a cash donation because it is not booked until it has been converted to cash.

ALL OF THESE TREATMENTS ARE INCORRECT. When the organization sells the stock, the sales price and basis (value on date of donation) are reported as “sales of securities” on the 990; the difference is a gain or loss. Tax basis must be used for this calculation. If the stock is sold in a subsequent year and has been marked to market for book purposes, the adjusted market value cannot be used. Tax basis must be used. Please consult your tax advisor for additional information.

Rhonda G. Williams, CPA gives workshops for nonprofit organizations and teaches continuing education classes on nonprofit topics for the National Business Institute. Her monthly newsletter “Nonprofit Notes” goes to approximately 150 organizations in New Mexico. Rhonda is licensed to practice accounting in Oklahoma and New Mexico and is a member of the American Institute of Certified Public Accountants and the New Mexico Society of Certified Public Accountants.

If you are interested in learning more about how you can diversify your funding, visit www.socialenterpriseventures.com to learn about Expedition and Road Trip training. This training is designed to give you the skills your organization needs to become more self-sufficient and less reliant on traditional fundraising. If you wonder whether social enterprise is right for your organization, contact me to set a time for a live Internet workshop that will walk you through the steps and answer many of your questions.

Another great resource is the Social Enterprise Alliance, an international network of nonprofits and other practitioners of social enterprise. Visit their web site at www.se-alliance.org. Their Internet forum is a wealth of information!

TWO GREAT BOOKS AVAILABLE NOW:

THE ABCs OF BUILDING BETTER BOARDS and
FAST FUNDRAISING FACTS FOR FAME & FORTUNE

Now you can add two great books to your agency library. The ABCs of Building Better Boards is just what you need to improve your Board’s potential. It includes ideas for recruitment, retention and recognition and has some great forms for you to copy and use.

The Association of Fundraising Professionals says of this book: “Here is a book that every senior fundraiser responsible for board recruitment and development should read once and then review annually...takes up where books full of theory fall short...give it a chance and you will discover a gem to be treasured.”

Learn how to deal with unproductive Board members and how to better define the roles of staff and Board. There is a chapter on financial and fiduciary facts, one on simple parliamentary procedure and much much more.

Discover how Board Job Descriptions and annual Commitment Letters will dramatically improve your Board’s effectiveness. See how a truly effective Nominating Committee will lead to a better Board.

Get good ideas for more efficient Board management and administration, including how to set up and manage effective committees.

The 3rd Edition of Fast Fundraising Facts for Fame & Fortune is full of ideas to improve your fundraising, including how to ask effectively, special events essentials and new ideas for fundraising.

Help volunteers get over the fear of asking for money and in-kind resources for your organization. Learn how marketing principles will make fundraising easier.

Learn about Jean’s Ten Rules for Fundraising Success and apply them to your organization immediately. This book puts the FUN into FUNDraising and gives good examples and ideas that really work, rather than using hard to follow formulas and theories.

Order Now So You Don't Forget

Go to the Order Form to order your copies of
The ABCs of Building Better Boards
and
Fast Fundraising Facts For Fame & Fortune ©

HOW CAN I HELP YOU?
TAKE THIS QUICKIE QUIZ

Please give me a call if you want to turn any NO into a YES. I can help with:

If you wish to be notified whenever a new issue of our newsletter is published, please fill out the simple form with your name and Email address and we will add you to our electronic mailing list.

If your email address changes or you want to add a second address, just fill out the form again and put a note in the "Comments" section.

"I love your newsletter! It's refreshing, fun
and filled with helpful hints"
Toni Paglia,
Director of Development, The ARCRC
Syracuse, New Yorkk

Is your Board of Directors functioning at its highest level?	YES	NO
How successful is your current fundraising?	YES	NO
Do volunteers need help asking for money and in-kind resources?	YES	NO
Does your organization have a dynamic strategic plan?	YES	NO
Are you having fun?	YES	NO