As we get closer to the end of the calendar year, many nonprofit organizations have already been gearing up their fundraising efforts.

As such, it’s a good time to revisit some important guidelines regarding donor acknowledgement best practices.

Proper recognition of donor contributions is not only an important matter for internal control. Nonprofits and their donors need to stay in compliance with the Internal Revenue Code.

Donor acknowledgement best practices for contributions of $250 or above

Despite the anticipated drop in philanthropy as a result of the new tax law (see our prior blog post here), the end of the year is still likely to be a popular time to give.

For nonprofits, there are some important requirements for all cash or non-cash donations valued at $250 or above, as detailed by the IRC.

For each donation, a nonprofit is required to substantiate it with the following:

• The name of the recipient nonprofit organization;
• The amount of a cash contribution;
• A description (but not value) of a non-cash contribution;
• A statement that no goods or services were provided by the organization, if that is the case;
• A description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution; and
• A statement that any goods or services provided by the organization in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

Written acknowledgements should be contemporaneous and must be provided by the due date of the donor’s tax return, or by the date that the donor actually files their return, whichever occurs first.

Some of these requirements are self-explanatory; others deserve explanation, as per below.

Non-cash donations: best practices

Non-cash donations, often referred to as “in-kind support” or “gifts in-kind”, can be a sticky area of accounting for nonprofits.

It’s important to clarify this in the interests of following donor acknowledgement best practices.

Generally, nonprofits should not acknowledge a value (explicitly or implicitly) to their donors (see the third point above). It is the donor’s job to determine an appropriate value for their own tax return.

This can present something of a dilemma because nonprofits are expected to come up with a value for their financial statements and tax returns.

Nonprofits are generally not in the business of valuing non-cash donations and might look to donors for guidance. However, ideally, a nonprofit should determine a value independently of the donor.

In a perfect world, the donor would come up with a value for their tax return, while the nonprofit would come up with their own value for their 990 and financial statements.

As a practical matter, if a nonprofit chooses to use a donor-provided value for their 990 and financial statements, precautions should be taken to ensure that they are not inadvertently acknowledging the donor’s estimated value of a non-cash donation.

One way for nonprofits to manage this is to provide the donor with an acknowledgment form containing a field for the donor to provide an estimated value of the non-cash donation; however, you should also make it clear that you acknowledge the description of what was donated, but provide no assurance on the donor’s estimated value.

Such a disclaimer might also remind the donor to check with their tax advisor to determine what deduction, if any, may be claimed on their tax return.

Many nonprofits worry about how to value and acknowledge “in-kind” professional services that they receive from attorneys, graphic designers, architects, health care professionals, etc.

While valuing services can be challenging, the IRS compliance considerations described above don’t come into play with donated services for one basic reason: they are not tax-deductible to the donor.

However, it’s a good idea, as a matter of good will, to provide acknowledgments to thank donors for volunteering.

And, while “in-kind” services will not be reflected in revenue on your 990, they must still show in your annual audited or reviewed financial statements, provided that they meet the GAAP criteria.

Quid pro quo contributions: best practices

Sometimes a “donation” may not be 100 percent donation. Donors may receive something of value in exchange.

When this occurs, the transaction is typically divided into two amounts: the fair market value of goods and services (not the cost) provided to the donor; and the contribution.

In these scenarios, a nonprofit must provide the donor with the necessary disclosure when the amount received exceeds $75.

A final best practice tip for donor acknowledgement

The above guidelines provide only an overview of best practice for donor acknowledgement. Every situation is different and may involve exceptions, or exceptions to exceptions, etc.

It’s best to seek further guidance from your tax professional.

Alternatively, refer to IRS Publication 1771 for a general discussion of donor acknowledgments (and some good examples of appropriate wording that nonprofits can use for donor acknowledgements); 4302 and 4303 for a discussion of vehicle donations; and 561 for determining the value of donated property.