Wednesday April 1, 2020
Article of the Month
Substantiation Requirements for Charitable Contributions, Part I
The Internal Revenue Service requires donors who claim charitable income tax deductions to substantiate the value of their charitable contributions. Donors may not understand the specific substantiation requirements when making charitable donations. The Service's substantiation rules are strict, and if these rules are not closely followed, a donor may lose his or her entire charitable deduction. Advisors should be prepared to explain these requirements, guide their clients through the process of substantiating charitable gifts and work with charities to meet the Service's requirements.
This article series will explore the substantiation rules for charitable contributions. This series will shed light on the substantiation requirements for specific gift types, including donations of real estate, stock and tangible personal property. Part I of this series will review the final regulations regarding substantiation for charitable donations for cash gifts.
This first article will examine the basic rules for substantiation of charitable cash contributions. It will review the various requirements for cash gifts of different values. It will discuss the specific substantiation requirements for cash-type charitable gifts, depending on the method of donation. By understanding the substantiation rules under the final regulations, advisors can help ensure that their clients accurately substantiate their charitable donations.
A Brief History of Charitable Contribution Substantiation
The rules for substantiating charitable contributions have expanded and evolved since their inception in 1917. The most recent round of changes resulted from the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. The Service incorporated updates from these Acts in proposed regulations.
In REG-140029-07 (6 Aug. 2008), the Service published proposed regulations relating to substantiation of charitable gifts with the intent of reducing valuation abuses for claimed donations. Just shy of 10 years later, the Service published final regulations in T.D. 9836 (27 July 2018). The final regulations for charitable contribution substantiation apply to contributions made after July 30, 2018.
The final regulations for Sec. 170 closely follow most of the proposed regulations. There are, however, some areas in which the final regulations differ. Charities can assist donors by understanding the rules and requirements for substantiation and providing correct receipts. It is important that advisors have an in-depth understanding of the substantiation requirements in order to safeguard charitable income tax deductions for their clients.
Due Date for Substantiation
A donor must obtain the appropriate substantiation documentation for his or her charitable gifts on or before the earlier of the date the donor files the original tax return or the due date for filing the original tax return for the year in which the contribution was made, including any extensions Sec. 170(f)(8)(C). Reg. 1.170A-13(f)(3). Reg. 1.170A-15(c). This deadline applies to substantiation in all forms, including receipts, records and contemporaneous written acknowledgements.
If a donor fails to obtain the appropriate substantiation, the Internal Revenue Code states "no deduction is allowed." Reg. 1.170A-15. Reg. 1.170A-16. Therefore, it is of the utmost importance for charities to understand the substantiation requirements and provide adequate documentation. Donors rely on charities to provide appropriate receipts to meet the Service's substantiation requirements. Professional advisors should inform their clients of these rules, and the strict nature of their enforcement, in order to safeguard their clients' charitable deductions.
Cash Gifts Under $250
Many donors make gifts of cash to charity. This is a convenient and simple giving option. A donor is required to substantiate a cash gift if a charitable deduction is going to be claimed on an income tax return. Reg. 1.170A-15(a). Donors (including individuals, partnerships and subchapter S corporations) must comply with these rules. Reg. 1.170A-15(f).
Donors may use cash, checks, gift cards redeemable for cash, credit cards, electronic fund transfers, online payment services or payroll deductions to make cash gifts to charity. Reg. 1.170A-15(b)(1). For purposes of charitable deductions and the substantiation rules, these monetary gifts are treated as cash gifts.
For all cash-type gifts, a donor is required to substantiate the deduction with a bank record or a written communication from the charity. The written communication must come from the charitable organization, show the name of the organization, the date of the contribution and the amount of the contribution. Reg. 1.170A-15(a)(1). An email from the organization is sufficient for substantiation purposes. Reg. 1.170A-15(b)(3).
Substantiation in the form of a bank record "includes a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website or a credit card statement." Reg. 1.170A-15(b)(2). Therefore, a blank pledge card provided from the charitable organization and completed by the donor is insufficient substantiation.
ExampleCash Gifts of $250 or More
Thomas wrote a check to Charity in his hometown in the amount of $200. This was a one-time gift to help with a current campaign. He made this gift in addition to his regular gifts to his favorite charities. When tax time rolled around, Thomas wanted to claim his $200 charitable gift as an itemized charitable income tax deduction. Thomas had misplaced his receipt from Charity, but he was able to locate scanned images of both sides of his canceled check through his bank's website. For purposes of claiming a charitable deduction, Thomas obtained sufficient substantiation for his check donation.
A donor who makes a cash gift must meet the general substantiation requirements for cash donations, as mentioned above. Reg. 1.170A-15(a)(1). Additional substantiation of a charitable contribution is required if a donor makes a cash gift of $250 or more, if an income tax deduction is going to be claimed. Reg. 1.170A-15(a)(1). The donor is required to obtain a contemporaneous written acknowledgment from the charity. Reg. 1.170A-15(a)(2). One document can be used to satisfy both the general substantiation requirements and the additional requirement for charitable cash gifts over $250. Reg. 1.170A-15(a)(3).
To satisfy the requirements of a contemporaneous written acknowledgement, the charity's receipt must contain a description of the property. The writing must state whether any goods or services were provided in consideration of the property. If goods or services were provided, the document must provide a good faith estimated value of the goods or services. It should be noted that intangible religious benefits are not required to be valued. However, if the charitable organization does provide intangible religious benefits, a brief statement to that effect should be included in the receipt.
Payroll Deduction Gifts
For a donor who uses a payroll deduction to make charitable gifts, special substantiation rules apply. The donor must obtain a pay stub, Form W-2, "Wage and Tax Statement" or other employer-provided document that contains the amount withheld for charity during the taxable year. Reg. 1.170A-15(d)(1)(i). The donor must also provide a pledge card, or other document prepared by or at the direction of the charity, that indicates the name of the organization. Reg. 1.170A-15(d)(1)(ii).
If the donor meets these substantiation requirements, he or she will be able to claim a charitable deduction. Donors satisfying the required substantiation for payroll deduction gifts do not have to meet the general cash substantiation requirements.
Certain Planned Gifts Substantiation
Cash-type gifts to certain trusts do not require satisfaction of all of the substantiation rules. Reg. 1.170A-15(g). If cash-type gifts are made to charitable remainder annuity trusts or charitable remainder unitrusts, Reg. 1.170A-15(a)(1) and (3) are not required to be met, which requires a bank record or written communication and grants permission for one document to contain the substantiation requirements. Reg. 1.170A-15(g). [Editor's note: It is more plausible that the drafters intended the section to read that Reg. 1.170A-12(a)(1) and (2) do not apply, which would mean that donors are not required to retain a bank record or written communication and obtain a contemporaneous written acknowledgment to satisfy the substantiation requirements.]
A charitable remainder trust has a vested remainder to charity, but donors are able to retain control to change the charitable beneficiary. Therefore, no receipt from charity is required. These special substantiation requirements do not apply to cash-type gifts to pooled income funds. Reg. 1.170A-15(g).
Donors rely on their professional advisors to provide guidance and to help safeguard their charitable deductions. It is imperative for professional advisors to understand the substantiation requirements for cash gifts to charity. Advisors must have knowledge of the final regulation requirements for substantiation and help their clients follow these regulations with strict compliance.
It is of the utmost importance for charities to understand their obligations to provide correct receipts for charitable gifts. Charities and professional advisors should work together to ensure that donors obtain the appropriate substantiation in a timely manner.