Ensuring Tax Deductibility for Donations: What Nonprofits and Donors Need to Know

Has your business considered making a charitable donation or grant for a nonprofit? Let’s take time to discuss an important topic for both charitable organizations and donors: the required acknowledgments that a 501(c)(3) organization must provide to ensure that donors can claim their donations as tax-deductible. 

Here’s what you need to know from business law attorney and founder, Paul Skeith.  

Why Are Acknowledgments Important for Donors?

When donors contribute to a 501(c)(3), they often do so with the understanding that their donation is tax-deductible. However, for a donation to be deductible, the IRS requires the donor to receive a written acknowledgment from the charitable organization.  

Without this, the donation may not qualify for a tax deduction, leaving donors in an unfortunate situation when they file their taxes. 

Read Our Blog: Tips for Negotiating Business Contracts 

What Should the Acknowledgment Include?

The acknowledgment provided by the 501(c)(3) organization must include several key pieces of information to comply with IRS regulations: 

1. Full Legal Name of the Organization: This ensures that the donation is tied to the correct entity.

2. The Amount of the Donation: If the donation is a cash contribution, the exact amount needs to be stated clearly.

3. A Description of Non-Cash Donations: If the donor made a non-cash donation, such as stock or property, the acknowledgment must describe the item given (though it doesn’t need to include a value).

4. Statement of No Goods or Services: If the charity did not provide goods or services in return for the donation, this must be stated explicitly. If goods or services were provided, such as a dinner or an event ticket, the acknowledgment must describe what was given and provide a good faith estimate of its value.

That last point about goods or services is especially important. If this language is missing, donations may not be tax deductible, and donors could face issues with the IRS. 

Timing Is Critical

The acknowledgment needs to be provided to the donor by either the date the donor files their tax return for the year of the donation, or the due date for that return, including any extensions. 

Failing to meet these deadlines can jeopardize the donor’s ability to claim the tax deduction. 

Read Our Blog: When Should I Consider Selling My Business? 

What Are the Best Practices for Nonprofits?

For nonprofits, there are a few best practices to ensure that all donor acknowledgments meet IRS requirements: 

• Use a Standard Form Letter: Create a standard acknowledgment letter that includes all the necessary information. This form can be sent out when donations are received.

• Automate Acknowledgments: Set up your accounting system to generate an end-of-year giving statement that includes the proper acknowledgment. This can save time and reduce errors.

What Should Donors Keep in Mind?

If you’re a donor, it’s essential to pay attention to the giving statements you receive. Make sure that all the required information is included so that your donations remain tax deductible. If you’re making a large donation, consider including the acknowledgment language directly in any grant agreement to avoid any future issues. 

Meeting acknowledgment requirements is crucial for maintaining donor trust and ensuring tax benefits. Following these guidelines can help nonprofits attract repeat donations that fund their work for years to come. On the other hand, donors should remain vigilant to ensure they receive proper documentation, enabling them to claim tax deductions without complications. 

If you are a non-profit or business owner wanting to donate to an organization, please contact Richards Rodriguez & Skeith for guidance on business contract and transactional services. By keeping these best practices in mind, both donors and nonprofits can enjoy a smooth and mutually beneficial giving process.