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Make this a ‘record’ tax year for your contributions

by on
in Small Business Tax,Small Business Tax Deduction Strategies

We can't overemphasize the need to keep the required records for charitable donations, especially because the IRS is turning up the heat on donation deductions. Here's a recap of the main recordkeeping rules for donors:

Extra paperwork for gifts above $250

The IRS requires you to obtain a written acknowledgment from a charitable group for cash gifts of $250 or more.

You must obtain that acknowledgment by the time you file your tax return. It should include the amount of the check or cash donated, a detailed description of any donated property and the value of the benefit received (if the charity provided any goods or services). Key exception: You don't have to establish a value for an "intangible religious benefit" such as belonging to a congregation.

If your over-$250 contributions were made via payroll deduction, you can substantiate the write-off with pay stubs or your Form W-2. Substantiation isn't required if the charity files a return with the IRS providing this information.

Tip: Separate, multiple gifts to the same charity won't trigger these recordkeeping requirements. For instance, if you gave $150 to the Red Cross earlier this year and another $150 to it on Sept. 1, you don't need to obtain a written acknowledgment for your gifts.

Keep track of 'quid pro quo' donations

If you make a "quid pro quo" contribution (i.e., a contribution made partially or fully in exchange for goods or services) for amounts above $75, you must obtain a "good faith" estimate from the charity that details the value of the benefit you received. (You don't need to substantiate de minimis benefits, such as coffee mugs or T-shirts with the charity's logo.)

Example: Say you attend a fund-raising dinner whose tickets cost $100 apiece. If you buy one ticket and the meal is valued at $40, you must obtain a written statement verifying that the deductible amount is $60 (less than the $75 threshold). Other special rules (e.g., deductions for tickets to athletic events through booster clubs) may apply.

New rules on noncash contributions

The 2004 tax law tightened the reporting requirements for noncash contributions to charity. The details:

• For gifts valued at more than $500: Taxpayers, other than a personal service corporation or closely held C corporation, must attach to the tax return a written description of the donated asset and other relevant information.

• For gifts valued at more than $5,000: You're required to obtain an independent appraisal of the donated property and attach an appraisal summary to the return. This requirement generally applies to C corporations for donations made after June 3, 2004. Previously, C corporations were only required to provide written appraisal for donations valued at $20,000 or more.

For partnerships and S corporations, these new rules are applied at the entity level. But if the entities fail to meet the new rules, the deductions will be denied to the partners and shareholders.

Tip: Maintain a folder with the records and receipts of your charitable gifts. This way you can consult it quickly when you fill out your 2005 return.

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