When and How to Issue Donation Acknowledgements in Your Nonprofit
By Anna Baumgardner, CPA | Published on 08/12/2021
Once a nonprofit organization receives gifts and contributions, the communication with donors does not stop there! Donors contributing money of any amount appreciate an acknowledgement and “thank you,” but some contributions are required by IRS regulations to be formally acknowledged by a receipt. The donor then includes those receipts as part of their charitable contribution documentation when filing their annual tax return. Without the receipt, the donor cannot prove that they made donations to a qualified charitable organization during the year. In this article, we’ll discuss when and how you should be issuing donation and gift acknowledgements and receipts.
When is a Donation or Gift Acknowledgment Required?
Per the IRS code regarding substantiating charitable contributions, an organization “must provide a written disclosure statement to donors of a quid pro quo contribution in excess of $75.00.” Consistent with most guidance from the IRS, that simple sentence has a few things to unpack. First, the definition of “quid pro quo contribution” in this context refers to a contribution where the donor provides payment to an organization where the payment represents a combination of:
a) the fair value of goods or services received from the organization, and
b) an amount in excess of the fair value of the goods or service received.
Common examples include sales of goods (t-shirts, novelty items, food) or event tickets. Regardless of the breakout between those two components, when the entire payment exceeds $75.00, a disclosure statement (gift acknowledgement) must be provided to the donor, even though only the portion of the payment exceeding the fair value of the goods or services received is deductible to the donor as a charitable contribution. Here are some examples to walk you through the process.
An organization sells a $40 concert ticket for $100. The total quid pro quo payment is $100. Of the $100, $40 is considered fair value exchange, and $60 is considered “excess.” The donor may only deduct $60 as a charitable contribution, but the entire payment is considered quid pro quo. Because the $100 payment exceeds $75, a written gift acknowledgement is required.
Alternatively, an organization sells the same $40 concert ticket for $60. The donor may deduct only $20 of the payment as a charitable contribution, and now the total payment is less than $75. In this case, no gift acknowledgement is required, but is encouraged.
However, some donations are simply contributions with no return value. In that case, a written acknowledgement should be provided to donors who contribute $250 or more per year. Donors cannot safely claim a charitable contribution of any type on their federal tax return without a written acknowledgement.
What Should be Included in a Gift Acknowledgement?
Unfortunately, the IRS does not provide a form that organizations can use as a template. The written acknowledgement, when required on a quid pro quo contribution, must include two things:
- Statement informing the donor that only the amount paid in excess of the fair market value of the goods/services received is deductible on their federal income taxes, and
- A good-faith estimate of the value of the goods/services that the donor provided to the organization.
The written acknowledgement, when required for a cash or property contribution, should include:
- A description of the non-cash contribution or amount of cash contribution, and
- A statement asserting that no goods or services were provided by the organization in exchange for the donation.
IRS guidance also recommends including details such as the name of the organization and the date of the contribution. These acknowledgements may be provided to the donor as separate receipts at the time of each contribution, or as periodic statements. The acknowledgements can be delivered as paper or electronically.
Exceptions to the Gift Acknowledgement Rules
Where there are rules, there are also exceptions – especially when it comes to IRS regulations. In the case of an acknowledgement for contributions of $250 or more, where the organization provides the donor with good or services in exchange for the donation (quid pro quo contribution), the organization may not have to provide a description of the goods or services exchanged if they are insubstantial. This is known as the “token” exception. When provided as part of a fundraising event, exchanged goods or services are considered insubstantial – token gifts of exchange – if:
- The goods or services exchanged are valued under the lesser of 2% of the donation received, or $111 (2019 IRS inflation adjustment), and
- The contribution received is greater than $55.50, and the organization has no more than $11.10 invested in the goods/services provided to the donor (2019 IRS inflation adjustment).
Additionally, a donation may not require a gift acknowledgement under the membership benefits exclusion. This exclusion provides that an annual contribution of $75 or less in exchange for an annual membership providing recurring rights or privileges with the organization may be considered insubstantial, and not require a gift acknowledgement.
If you are using a fundraising and donor management software like Little Green Light or Network for Good, you may already have access to automated gift acknowledgements. You may be able to customize your software to automatically send acknowledgements for certain dollar amounts or campaigns, and select the details that are included on those acknowledgements. Some of these programs also integrate directly into your accounting software, minimizing the legwork of keeping your donations and your books up to date.
For additional details on gift acknowledgements or accounting for donations, please do not hesitate to reach out to us!
Anna Baumgardner is a licensed CPA who advises and provides outsourced accounting and tax solutions for nonprofits at RY CPAs.