Any organization that has received an IRS determination letter recognizing it as a 501(c)(3) organization may offer donors a tax deduction for their donations. However, for your donors to receive a tax deduction, your nonprofit must properly acknowledge charitable contributions it receives by following the requirements described below.
What is a Donation Acknowledgment?
As summarized in IRS Publication 1771 on Charitable Contributions – Substantiation and Disclosure Requirements, donors must have a bank record (e.g., a canceled check) or written communication from the charitable organization acknowledging the gift to claim an income tax deduction for any donation to a 501(c)(3) organization, no matter how small.
Are Nonprofits Required to Write a Donation Acknowledgment?
For donations to a 501(c)(3) organization of less than $250, a simple donation receipt can function as a donation acknowledgment. However, if the donation is $250 or more a donor must have a written acknowledgment from the nonprofit to receive a charitable tax deduction. Although nonprofits are not legally required to provide this written acknowledgment, it is a best practice for nonprofits to provide a written acknowledgment for donations of any size so that donors can satisfy their own legal obligations.
That said, 501(c)(3) organizations are legally required to provide a “written disclosure” to any donor who receives goods or services in exchange for a contribution of more than $75 (often referred to as a “quid pro quo” contribution), subject to certain exceptions described below regarding token items. Nonprofits that fail to provide the required written disclosure are subject to penalties of $10 per gift, not to exceed $5,000 per fundraising event or mailing. This written disclosure for a quid pro quo contribution may be included as part of the general written acknowledgment issued to donors.
When Should My Nonprofit Send a Donor Acknowledgment Letter?
As a best practice, a nonprofit should acknowledge all donations within a few days of receipt. Legally, the IRS requires only that a written acknowledgment be received by the donor before the donor files their tax return for that year or prior to the donor’s tax filing deadline (including extensions), whichever is earlier. However, the written disclosure for a quid pro quo contribution must be provided to the donor in connection with either the solicitation or the receipt of the contribution in question. By providing all written acknowledgments and disclosures within a few days of receipt of the contribution, a nonprofit can make sure it is satisfying both timing requirements.
What Do I Need to Include in an Acknowledgment Letter After Donations?
The nonprofit’s written acknowledgment must include:
- The name of the organization;
- The date of the contribution;
- The amount of the contribution (if money);
- Whether the charity provided any goods or services in return; and
- If so, a description and good faith estimate of the value of any goods or services received by the donor and a statement that the donor’s deduction is limited to the portion of its contribution that exceeds the value of the goods or services.
- Example: “Thank you for your gift of $1,000 to Alaska Opera received on August 11, 2023. You received a performance valued at $150 and a reception valued at $50 in exchange for your donation. Accordingly, the deductible portion of your contribution is limited to $800.”
The donor acknowledgment letter should include only a description but not the value of any property other than cash contributed. It is the donor’s obligation, not the nonprofit’s, to place the value on all non-cash donations.
- Example: “Thank you for your November 15, 2022, gift to Alaska Opera of a used 2018 MacBook Pro.”
See IRS Publication 1771 for more detailed information on acknowledging charitable contributions and special situations such as donations of cars, art, land, and other types of property.
What About Donations for New Nonprofits?
Note that a new nonprofit may not issue an acknowledgment stating that the donor’s contribution is tax-deductible until after it has received its IRS determination letter (or it will face stiff penalties). Instead, it should inform donors of its current status and that the donor’s contribution will be tax-deductible retroactively to the date it was made after the nonprofit receives its IRS determination letter.
- Example: “Thank you for your donation of $1,000 to Alaska Opera on August 11, 2023. We have applied for exemption under section 501(c)(3) and are awaiting our determination from the IRS, which remains subject to the IRS’s discretion. Once the IRS determines that the organization is tax-exempt, your contribution will be tax-deductible to the full extent of the law as of the date of your donation.”
What If We Give Donors a Small Thank You Gift?
The IRS refers to a thank-you gift of an insubstantial good or service provided in exchange for a contribution as a “token item.” Nonprofits do not have to describe token items in the acknowledgment letter as a good or service received by the donor (i.e., a quid pro quo).
For the thank you gift to be considered a token item, the donation must be made in the context of a fundraising campaign soliciting contributions that states that the full amount of the contribution is deductible and that only goods and services of an insubstantial value were received, and:
- The fair market value of the benefits received by the donor does not exceed the lesser of 2 percent of the contribution or $125 (these values are for the 2023 calendar year; the IRS updates them every year for inflation); or
- The contribution is at least $62.50, the items provided bear the organization’s name or logo (e.g., calendars, mugs, posters), and the cost of these items to the nonprofit was equal or less than the limit for “low-cost articles,” which is $12.50 (these values are for the 2023 calendar year; the IRS updates them every year for inflation); or
- The payment is for an annual membership of $75 or less and the only benefits received are: (a) free or discounted admission to the nonprofit’s facilities or events; (b) free or discounted parking; or (c) discounts to the nonprofit’s gift shop (or similar benefits).
Conclusion
Every charitable organization should have a written process for receiving donations and promptly issuing donation acknowledgments. You should tailor the acknowledgment according to the size of the donation, the donor’s relationship with the organization (i.e., if they are first-time donors or long-time donors), and the reason for the donation (if this is known). These letters can be the first step towards fostering a long-term relationship between the organization and the donor. The Law Firm for Non-Profits can help your organization establish a legally compliant acknowledgment process or improve your existing acknowledgment process.