Issuing Donation Acknowledgments Before Receiving Tax-Exempt Recognition from the IRS

When a new ministry is in the process of being formed, it is common for givers to make gifts to the ministry and to desire an acknowledgment that may be used for tax deduction purposes. The question often arises whether and when the new ministry can legitimately issue charitable acknowledgments.

While guidance from the Internal Revenue Service (IRS) is sparse, the following observations may be helpful in determining when a new ministry may begin issuing new acknowledgments.

The earliest date that a ministry may appropriately issue donation receipts is the date on which the charitable entity is legally formed. This is generally the date the incorporation is approved by the state. The importance of the legal formation (generally the date the incorporation is approved by the state) is emphasized in the instructions for Form 1023, which states that if Form 1023 is filed within 27 months after the end of the month in which a ministry is legally formed, and the IRS approves the application for tax-exempt status, the effective date of the tax-exempt status is retroactive to the legal date of formation. Therefore, it appears that only gifts received on or after the date of incorporation can be appropriately receipted for charitable donation purposes.

Guidance from the IRS is also very limited in terms of issuing donation acknowledge­ments between the date of legal formation and the date on which the IRS approves the ministry’s tax-exempt status. However, the IRS has provided guidance concerning the deductibility of gifts in relation to ministries which have had their tax exemption revoked by the IRS:

Contributions made to an organization whose tax-exempt status is subsequently revoked are deductible if the donor made the contributions without the knowledge that the organization operated for non-exempt purposes. However, once the revocation is made public, contributions are no longer exempt. Reg.1.170A-9(f)(5)

It is not clear if the regulation above covers contributions made to a ministry which applies for tax exemption but never receives approval.

For many ministries, obtaining tax-exempt status is a relatively routine process. Therefore, it is typical for them to begin to issue acknowledgments as soon as they are incorporated with a high degree of certainty that they will be approved for tax-exempt status. However, some major givers and many foundations require an exemption determination letter. Therefore, a ministry whose tax-exempt status has not been approved should alert these particular givers that the ministry does not yet have an exemption determination letter.

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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