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Standard 7.5 highlights the communication required between a charity and its donors for the distribution of certain premiums or incentives in exchange for a contribution. Standard 7.5 is in harmony with the U.S. tax rules and does not purport to establish requirements for acknowledgments to donors beyond these rules.
Tax law and regulations permits donors to deduct only the net value of their gifts to charities. If a charity provides goods or services (for example, books, tapes, records, Christmas cards, gift subscriptions, Bibles, admission tickets, etc.) to a donor as an inducement or in exchange for a contribution, the charity should generally provide a good faith estimate of the value of such goods or services.
There is an exception for so-called "token" items given by a charity to a donor. If the goods or services provided by a charity are "insubstantial," they do not have to be described in the acknowledgment prepared by the charity.
Goods and services are considered to be insubstantial if the payment occurs in the context of a fund-raising campaign in which a charitable organization informs the donor the amount of the contribution that is a deductible contribution, and:
- the fair market value of the benefits received does not exceed the lesser of 2 percent of the donor’s payment or an amount adjusted annually by the IRS, or
- the payment is at least an amount adjusted annually by the IRS and the only items provided bear the organization’s name or logo (e.g., calendars, mugs, or posters), and the cost of these items is within the limit adjusted annually by the IRS.
All benefits to a donor must be aggregated for the year. Free, unordered low-cost articles are also considered to be insubstantial.
If a religious organization provides only "intangible religious benefits" to a contributor, the acknowledgment does not need to describe or value those benefits. The charity can simply state that the organization provided intangible religious benefits to the contributor. Intangible religious benefits are not usually sold in commercial transactions outside a gift context.
Written disclosure. A donor may only take a contribution deduction to the extent that his or her contribution exceeds the fair market value of the goods or services the donor receives in return for the contribution; therefore, donors need to know the value of the goods or services. A charity must provide a written disclosure statement to a donor who makes a payment exceeding $75 partly as a contribution and partly for goods and services provided by the charity. A contribution made by a donor in exchange for goods or services is known as a quid pro quo contribution.
A required written disclosure statement must:
- inform a donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization, and
- provide a donor with a good faith estimate of the fair market value of the goods or services.
A charity must furnish a disclosure statement in connection with either the solicitation or the receipt of the quid pro quo contribution. The statement must be in writing and must be made in a manner that is likely to come to the attention of the donor. For example, a disclosure in small print within a larger document might not meet this requirement.
A written disclosure is not required:
- when the goods or services given to a donor meet the "token exception," or the "intangible religious benefits exception"
- when there is no donation element involved in a particular transaction, such as a typical bookstore sale
If a charity chooses to the inform the donor in the solicitation about the quid pro quo nature of the transaction, the following statement could be made: "For your gift of $50 to help us reach Seniors for Christ, we will send you a beautiful cloth-bound book containing 365 chapters of Biblical reassurance—a $13.95 retail value. The retail value must be deducted from your contribution to our ministry in determining the tax-deductible portion of your gift."
Most donors appreciate receiving the information prior to their commitment to give to the ministry. If the receipt is used to meet the Standard, a suggested format is:
Thank you for your gift. The Internal Revenue Service stipulates that gifts to this ministry are deductible to the extent that they exceed the fair market value of anything received in return. The following information is provided to assist you in accurately reporting your charitable contribution:
| Amount of gift |
$ 50.00 |
| Retail value of book |
13.95 |
| Tax-deductible contribution |
$ 36.05
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Determining the fair market value of a premium or incentive. If the premium has a counterpart or is sold in the marketplace, the normal retail price or admission charge is the fair market value. When there is no established market, the organization must use a "reasonable estimate" of the premium's fair market value as a nondeductible amount.
The IRS is concerned with the value of the item in the hands of the donor, without regard to how much or how little it cost the organization to obtain the item. For example, an organization could have an interested supporter who contributes $10,000 worth of books to the ministry. If those books are used as premiums in return for a contribution, donors must deduct from their respective contributions the fair market value of the books received even though the books technically cost the ministry nothing.
On the other hand, the fair market value of a premium may actually be less than the cost of the item to the ministry. For example, the ministry might have published a book, which either was not successful or no longer has an active market. In that case, the cost of the book could be considerably higher than the current fair market value. In some situations, the cost may be indicative of the fair market value, such as an out-of-print book. In the latter case, the cost of production can be used as an indicator of fair market value.
If a premium or incentive was donated to the charity, the charity must make a reasonable estimate of what the items would have cost had they been purchased. That includes donated services as well.
The fair market value of a premium is the price the donor would ordinarily have paid to purchase the premium item at retail. In the case of a book or tape that is not sold at retail, the ministry should make a reasonable estimate of the retail value, based on the retail price of comparable, but not necessarily identical, items.
For example, assume a ministry produces and distributes, solely as a premium to donors, one of its principal speaker’s teaching videotapes. Other videotapes of similar length and quality by the same speaker are sold by the ministry and Christian bookstores for $19.95, and this is also a common price for instructional videotapes by other well-known Christian speakers.
In this case, the fair market value of the tape should reasonably be estimated at $19.95, notwithstanding that the ministry's fully allocated production cost is only $12.00 per tape.
Of course, if a donor can substantiate his ability to purchase the premium at a lower price (e.g., through a discount-buying club) when the contribution was made, the donor may claim a correspondingly greater deduction.
In the rare instance when the donee offers to provide a large quantity of an item (such as would ordinarily be purchased at wholesale) in exchange for a monetary gift, it would then be appropriate to use a wholesale price as the basis for determining the fair market value of the premium to the donor.
Premiums or incentives provided by a "suggested contribution." The essential fact is that the donors are being given an opportunity to receive something of value in exchange for a contribution of a minimum amount. The term "suggested donation" or "for your gift of" does not change that situation. The fair market value of the premium must still be deducted from the contribution. Only if the ministry makes a ministry-related item available to all requesting it—without any reference to or connection with a minimum or suggested donation—would there be any basis for not treating the premium as goods or services provided in exchange for contributions. There may be sales tax implications in some states if a transaction is in substance a sale of goods or services.
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