Academic journal article Journal of Accountancy

Sweet Charity

Academic journal article Journal of Accountancy

Sweet Charity

Article excerpt

Even when they are being charitable, people like the idea of getting something in return. Many organizations recognize this and use inducements to gain contributors. As part of their fund-raising activities, these charities will offer something of value in return for a contribution.

The problem arises when it comes time for taxpayers to deduct these contributions. Theoretically, the charities are responsible for determining the value of any benefits given to donors and should be advising them about how much of their contributions are deductible.

BENEFITS RECEIVED

If a taxpayer voluntarily contributes money or property to a charity and receives nothing in return, that contribution is fully deductible. Generally, if a donor receives benefits or privileges (that is, something of value) in return for a contribution, the deduction should be limited to the amount of the contribution minus the fair market value (FMV) of the benefit received. For example, if a taxpayer receives a ticket to a concert in return for a donation, his deduction is the amount donated less the FMV of the ticket. (Note that not using the ticket would not increase the deductible amount. The key to the deduction is whether the benefit is accepted, not whether it is exercised.)

This FMV is to be determined by the charitable organization and passed on to its patrons so they can determine the deductible amounts of their contributions. If the charities cannot come up with an exact determination of a benefit's value, a reasonable estimate may be used.

New guidelines. Many charities have found this requirement to be extremely burdensome, especially for small items that are of token value relative to the amounts contributed. In response, the Internal Revenue Service has released a set of guidelines that may ease this problem. If the guidelines are met, charities may treat the benefits as having insubstantial value and may advise contributors that their donations are fully deductible.

Covered activities. The contributions must be part of a fund-raising campaign designed to raise deductible contributions, in which the charity determines the FMV of the benefits offered (or a reasonable estimate if an exact determination is not possible); the charity states in its solicitations (whether written, broadcast, telephoned or made in person), as well as on any documents issued in connection with contributions, how much is deductible. …

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