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The charitable proof is in the tax pudding

by on
in Small Business Tax

Undoubtedly, the deduction for charitable donations is one of the biggest write-offs on your personal tax return. That’s why the IRS continues to scrutinize deductions claimed by high-­income taxpayers.

Strategy: Stick to the strict letter of the law. In particular, make sure you comply with all the record-keeping requirements in this area.

Be aware that recent tax law changes impose tough substantiation rules on cash and cash-equivalent donations. Now, a new ruling shows that the IRS truly means business.

Here’s the whole story: Effective for contributions in tax years beginning after Aug. 17, 2006, no deduction is allowed for any contribution of cash, check or other monetary gift unless you can show a bank record or written communication from the charity. The written communication must indicate:

  • The amount of the contribution
  • The date you made the contribution
  • The name of the charitable organization.

Therefore, you can’t simply write off cash handouts like you could in the not-so-distant past. But contributions made by credit card or debit card may be substantiated by bank statements.

Under prior law, the tax law already required a written acknowledgment from a qualified charitable organization for charitable gifts of $250 or more. The acknowledgment must be obtained by the earlier of the date you file your tax return or the due date of the return (plus any extensions). It should include the amount of cash or the check; a description of any noncash property that was contributed; and the value of any goods or services provided. Note: If these goods or ­services received consist solely of “intangible religious ben­efits,” you can substitute a statement to that effect.

For a “quid pro quo contribution” (i.e., a contribution that is made at least partially in exchange for goods or services) exceeding $75, the charity must provide a “good faith estimate” of the goods and services received and the amount of payment exceeding the value of the benefit.

Example: Suppose you attend a fundraising dinner sponsored by a charitable organization. The tickets cost $80 apiece, but each dinner is valued at $30.

If you and your spouse both attend the dinner, you can deduct $100 out of the total cost of $160. The charity must provide confirmation of the meal’s value and the amount of your deduction.

However, a written statement is not required if you receive token goods, minimal services or intangible religious benefits in return for your donation.

In the new ruling, a taxpayer failed to obtain a contemporaneous written acknowledgment from the charity for a charitable contribution. The taxpayer then attempted to meet the requirement by having the charity file a revised Form 990, Return of Organization Exempt From Income Tax, identifying the donation. But this didn’t suffice under the IRS’ strict reading of the law.

Reason: The law provides that charities do not have to substantiate donations if, under applicable regulations, they directly report to the IRS the information required in a contemporaneous written acknowledgment. But the IRS has not yet issued any regs or identified any other forms for charities to use for this purpose. Therefore, the taxpayer can’t satisfy the contemporaneous written acknowledgment requirement through a reference to Form 990 or any other form. (IRS Chief Counsel Advice 529240-11, 5/20/11)

As a result, the taxpayer lost out on a six-figure donation!

The IRS requires additional information on your tax return for noncash contributions exceeding $500. Moreover, if you donate property in excess of $5,000, you must obtain a qualified appraisal of the value of the donated property.

Tip: The cost of the appraisal is deductible subject to usual 2%-of-AGI floor for miscellaneous itemized expenses.

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