Do You Have Substantiation for Charity Given in 2023?
Did you donate to charity last year? Acknowledgment letters from the charities you gave to may have already shown up in your mailbox. But if you didn’t receive such a letter, can you still claim a deduction for the gift on your 2023 income tax return? It depends.
What the Law Requires
To prove a charitable donation for which you claim a tax deduction, you must comply with IRS substantiation requirements. For a donation of $250 or more, this includes obtaining a contemporaneous written acknowledgment from the charitable organization stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.
“Contemporaneous” means the earlier of: The date you file your tax return or the extended due date of your return. Therefore, if you made a donation in 2023 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2023 return. Contact the charity now and request a written acknowledgment. Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is adequate. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you with a written acknowledgment as described earlier.
No Longer a Tax Break for Nonitemizers
Currently, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under previous COVID-19 relief laws, an individual who didn’t itemize deductions could claim a limited federal income tax write-off for cash contributions to IRS-approved charities for the 2020 and 2021 tax years. Unfortunately, the deduction for nonitemizers isn’t available for 2022 or 2023.
More Requirements for Certain Donations
Some types of donations require additional substantiation. For example, if you donate property valued at more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return. For donated property with a value of more than $5,000, you generally must obtain a qualified appraisal and attach an appraisal summary to your tax return.
Donor Advised Charitable Giving
Many donors opt for effectuating their charitable giving through a donor-advised fund (DAF). Giving to charity through a DAF offers an immediate tax deduction and affords strong support documentation to ward off trouble should a donor be challenged by the IRS.
Contact your accounting professional at Roth&Co if you have questions about whether you have the required substantiation for the donations you hope to deduct on your 2023 tax return. We can also advise on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2024 return.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Nonprofits and Insurance: Getting it Just Right
Whether you’re starting up a not-for-profit organization or your nonprofit has existed for years, you may have questions about insurance. For starters: What kind do you need? How much? Are you required by your state or by grantmakers to carry certain coverage?
Much depends on your organization’s size, scope and programming. But your goal should be to carry what’s required to meet any regulatory or funding mandates and to address legitimate risks. Although there are many types of insurance available to nonprofits, it’s unlikely that you need all of them.
The essentials
One type of insurance you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.
Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).
Depending on your nonprofit’s operations and assets, you might want to consider such optional policies as automobile, product liability, fraud/employee dishonesty, business interruption, umbrella coverage, and directors and officers liability. Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your nonprofit’s general liability insurance extends to special events.
Biggest threats
Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats. Then discuss with your financial and insurance advisors the kinds — and amounts — of coverage that will mitigate those risks.
Be careful not to assume insurance alone will address your nonprofit’s exposure. Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies such as new employee orientations and ongoing training.
Don’t go overboard
Some organizations buy more insurance coverage than they need, which can be costly. Make sure you’ve thoroughly analyzed your nonprofit’s risks and buy only what’s necessary to protect people and assets.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
© 2023
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Passing the Public Support Test
Unless 501(c)(3) organizations prove they’re publicly supported, the IRS assumes they’re private foundations. The distinction is important because publicly supported charities enjoy higher tax-deductible donation limits and generally are exempt from excise taxes and related penalties.
The tax code recognizes several types of publicly supported organizations, but most 501(c)(3) charities fall into one of two categories. The first, Sec. 509(a)(1) organizations, primarily rely on donations from the general public, governmental units and other public charities. The second category, Sec. 509(a)(2) organizations, have significant program revenue. The IRS has established tests for each type of organization. If your nonprofit doesn’t pass the 509(a)(1) test, it may qualify under Sec. 509(a)(2).
First test
The Sec. 509(a)(1) test requires that:
- You have at least one third of your total support from the public, governmental agencies or other public charities, or
- You have at least 10% of your total support from such sources and that the “facts and circumstances” indicate you’re a publicly supported organization.
Several facts and circumstances help determine whether your organization is publicly supported — for example, whether you have actual sources of support above the 10% threshold, answer to a representative governing body and serve the general public on a continuing basis. Such tests measure public support over a five-year period, including the current and four prior tax years.
The public support percentage excludes certain types of contributions, program revenue fees from related activities, unrelated business income, investment income and “unusual grants.” Net income from unrelated activities and gross investment returns are included in total support, though unusual grants aren’t.
Second test
Under the Sec. 509(a)(2) test, your organization must receive at least one-third of its support from contributions from the public and gross receipts from activities related to its tax-exempt purpose. No more than one-third of its support may be from investment income and unrelated business taxable income. Public support is measured over a five-year period.
This test is subject to limitations. When calculating public support, you can count only the greater of $5,000 or 1% of your total exempt-purpose-related revenue from a single individual, corporation or governmental unit in the numerator. Receipts of any type or amount from disqualified persons, such as board members, aren’t considered public support either.
Be careful about misclassifying gross receipts that are subject to the limits. IRS auditors will look for payments that should be deemed gross receipts but instead are classified as, for example, contributions, gross investment income or unrelated business taxable activity.
Mission critical
It’s critical to maintain your nonprofit’s publicly supported status. Certain organizations automatically qualify as public charities. For other nonprofits, we can help determine whether you pass one of the two tests.
© 2023
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Before your nonprofit celebrates that new grant…
Most not-for-profits can’t afford to turn down offers of financial support. At the same time, you shouldn’t blindly accept government or foundation grants simply because they’re offered. Some grants may come with excessive administrative burdens, cost inefficiencies and lost opportunities. Here’s how to evaluate them.
Administrative and other burdens
Smaller or newer nonprofits are at particular risk of unexpected consequences when they accept grants. But larger and growing organizations also need to be careful. As organizations expand, they usually enjoy more opportunities to widen the scope of their programming. This can open the door to more grants, including some that are outside the organization’s expertise and experience.
Even small grants can bring sizable administrative burdens — for example, potential reporting requirements. You might not have staff with the requisite experience, or you may lack the processes and controls to collect the necessary data.
Grants that go outside your organization’s original mission can pose problems, too. For example, they might cause you to face IRS scrutiny regarding your exempt status.
Costs vs. benefits
As for costs, your nonprofit might incur expenses to complete a program that may not be allowable or reimbursable under the grant. As part of your initial grant research, be sure to calculate all possible costs against the original grant amount to determine its ultimate benefit to your organization.
Then, if you decide to go ahead with the grant, analyze any lost opportunity considerations. For unreimbursed costs associated with new grants, consider how else your organization could spend that money. Also think about how the grant affects staffing. Do you have staff resources in place or will you need to hire additional staff? Could you get more mission-related bang for your buck if you spent funds on an existing program as opposed to a new program?
Quantifying the benefit of a new grant or program can be equally (or more) challenging than identifying its costs. Assess each program to determine its impact on your organization’s mission. This will allow you to answer critical questions when evaluating a potential grant.
The long-run
If your organization has lost grants during the COVID-19 pandemic, you’re probably tempted to welcome any new funds with open arms. But in the long-run, it pays to scrutinize grants before you accept them. Contact us if your nonprofit is trying to grow revenue and needs fresh ideas.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
© 2023