charitable deduction

Leave-Based Donation Programs for Victims of Hurricane Harvey

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In response to the extreme need for charitable relief for victims of Hurricane Harvey, some employers are adopting leave-based donation programs.  Under these programs, employees can essentially donate their vacation and sick pay to charitable organizations.

The IRS recently issued a notice that cash payments an employer makes to a charitable organization in exchange for vacation, sick, or personal leave that its employees elect to forgo will NOT constitute income or wages of the employee if the payments are:

  • Made to charitable organizations for the relief of victims of Hurricane Harvey and Tropical Storm Harvey and
  • Paid to the charity before January 1, 2019

The IRS will not allow double dipping—employees won’t have to claim the donated vacation, sick, or personal leave time as income but they will also not be allowed a charitable donation for the amount donated.

The employer will take a business (and not a charitable deduction) for the amount of vacation, sick, or personal leave time donated.

People also need to be aware of scam artists that have created fraudulent charities.  The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips:

  • Be sure to donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find qualified charities; donations to these charities may be tax-deductible.
  • Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution. Scam artists may use this information to steal a donor’s identity and money.
  • Never give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
  • Consult IRS Publication 526, Charitable Contributions, available on IRS.gov. This free booklet describes the tax rules that apply to making legitimate tax-deductible donations. Among other things, it also provides complete details on what records to keep.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

IRS Issues Reminder of What Is Needed to Prove Charitable Deductions

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charitable donationsAs people are getting their last minute tax deductions in before the end of the year, the IRS published reminders to taxpayers of what documentation is needed to claim charitable donations.

The documentation requirements are strict and if there is any deficiency in proof, the IRS can disallow the deduction even if you can prove payment with a canceled check or receipt.

So, here are the requirements:

Rules for Clothing & Household Items

To be deductible, clothing and household items must be in good condition or better. A clothing or household item (e.g., furniture, furnishings, electronics, etc.) for which a taxpayer claims a deduction of over $500 does not have to be in good condition if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgment from the charity for all gifts worth $250 or more.

Rules for Donating Money

To deduct donations of money, regardless of amount, the taxpayer must have a bank record or a written statement from the charity showing the name of the charity and the date and amount of the contribution.

Bank records include: canceled checks, bank or credit union statements, and credit card statements. The bank record should show the name of the charity, the date of the donation, and the amount paid.

For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 showing donations, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

For money donations $250 or more, the taxpayer MUST receive an acknowledgment from the charity BEFORE filing the tax return in order to claim the deduction. If an acknowledgment is not received, the taxpayer cannot claim the deduction even if proof of donation is established by bank record.

Other Reminders

Only donations to qualified organizations are deductible. Donations directly to needy individuals are not deductible. The IRS maintains a database of qualifying organizations at https://apps.irs.gov/app/eos/mainSearch.do;jsessionid=mg3hp1dT8jJZjNPqoF3SdA__?mainSearchChoice=pub78&dispatchMethod=selectSearch

Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2015 even if the credit card bill isn’t paid until the following year. Donations by check are deductible in 2015 if they are mailed out before the end of the year.

For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions.

For donations of all property, including clothing and household items, the taxpayer should get from the charity a receipt that includes the name of the charity, the date of the contribution, and a reasonably detailed description of the donated property.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

How Businesses Deduct the “Portion of Revenues Donated to Charity”

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business charitySome businesses advertise that they will donate a certain percentage of their revenues to a charity. The IRS recently issued guidance from its Chief Counsel that explains how these donations to various organizations are deducted.

In the Chief Counsel Advice (CCA), the business donated funds to organizations that were qualified charities and to organizations that were not qualified charities, but had a social mission included in their corporate bylaws.

Donations to Qualified Charities

An issue that the CCA addresses is whether the donations to qualified charities were deductible as charitable donations (IRC Section 170) or as ordinary and necessary business expenses (IRC Section 162).

The CCA resolves this issue by stating when the transfer to a qualifying charity is directly related to the taxpayer’s business and is made with a reasonable expectation of financial return commensurate with the amount transferred, the transfer is treated as a business expense and not as a charitable donation deduction.

The CCA held that the business appeared to have acted with the reasonable belief that, in establishing the charitable donation program, it would enhance and increase its business. As a result, the business’ donations to qualifying charities were deductible as ordinary business expenses.

This is beneficial to taxpayers for a couple reasons. The first is that, while ordinary business expenses must still be substantiated, charitable donations are subject to much stricter substantiation requirements.

The other reason that it is preferential for these expenses to qualify as business deductions is that charitable contributions are subject to percentage-of-income limitations. Pass through entities pass charitable donations through to their owners where the charitable donations are deducted as itemized deductions (generally limited to 50% of AGI). Ordinary businesses expenses are not subject to these limitations.

Donations to Nonqualified Charities

If the organization is not a qualifying charity then the donation is clearly not deductible as a charitable contribution. However, if the business has a reasonable expectation of commensurate financial return from the donations, then the donation will be deductible as an ordinary and necessary business expense.

There is an exception for donations to organizations that engage in lobbying. A business expense is not allowed for any amount paid in connection with influencing legislation or participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office.

Merely donating money to an organization conducting lobbying activities is not an activity for purposes of supporting a lobbying communication. The CCA says that this phrase is intended to include more direct support such as research, planning, and coordination.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Not Receiving a Proper Acknowledgment Can be Fatal to a Charitable Deduction

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Congress set strict rules on substantiating charitable deductions.  There is a recent tax court case that disallowed charitable deductions even though the taxpayers had proof of payment through canceled checks.  The purpose of this blog is to list the substantiation requirements for making cash contributions and to review the facts of this recent case.

How to Substantiate Chartiable Contributions of Cash

When making a cash contribution of $250 or less, all that is required is a bank record (e.g., canceled check) or written receipt from the charity showing the charity’s name, amount, and date of donation.

When making a cash contribution of more than $250, no deduction will be allowed unless the taxpayer receives a written contemporaneous acknowledgement from the charity.  The acknowledgment must include ALL of the following:

  • The name and address of the charity
  • The date of the contribution
  • The amount of cash contributed
  • Whether the charity provided the donor with any goods or services in exchange for the contribution; and, if so, a description and a good faith estimate of the value of the goods and/or services provided to the donor.

To be contemporary, the acknowledgement must be obtained by the taxpayer on or before the earlier of:

  • The date the donor files her tax return for the year the donation was made OR
  • The return’s extended due date.

The Court Case

In the Durden case, the Tax Court disallowed a taxpayer’s charitable contribution even though the taxpayer had canceled checks and a written acknowledgement from the charity.  The reason the contribution was disallowed was because the acknowledgement was insufficient.

On their 2007 tax return, the Durdens claimed a charitable deduction of $22,000 for contributions to their church.  The contributions were made by check.  The Durdens received a written acknowledgement from the church; however, the acknowledgement was not sufficient because it did not state whether the Durdens received any goods or services in exchange for the contribution.  In fact, they did not.  The church issued another written acknowledgment stating that the Durdens did not receive any goods or services in exchange for their contribution.  However, this second acknowledgment was insufficient because it was received by the Durdens after they filed their tax return that listed the charitable contribution (remember that the acknowledgment has to be received by the earlier of (1) when the return is filed or (2) the extended due date of the return).

Taxpayers must be sure that the acknowledgment they receive from the charity lists all of the items in the substantiation requirements above.  Even though the Durdens did not receive anything in exchange for their contribution, the Tax Court held that the written acknowledgment had to explicitly state that nothing was received in exchange for the contribution.

Also, don’t forget the timing requirement.  It is important not to file the tax return until you receive the written acknowledgment.

Example:  John donates $1,000 to his church in December 2012 and has a canceled check.  He files his tax return on January 18, 2013.  He receives a written acknowledgment from the church on January 31, 2013.  His charitable contribution will NOT be allowed because he didn’t have the written acknowledgment when he filed his tax return. 

These are very strict rules and can result in very unfair treatment.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

 

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