Charitable giving constitutes an important part of life for many people, one that comes to the forefront during the holiday season. Nothing warms the heart quite like knowing you made a real difference.
While the decision to make a charitable contribution is a rewarding one, it also can be an involved one. Deciding who to support, determining if your contribution is tax deductible and what type of documentation is required to support the deduction all should be considered.
Deductible charitable contributions include money and property given to nonprofit organizations with an IRS designated tax-exempt status. IRS Publication 557 defines several types of nonprofit organizations, including:
501(c) (3) groups organized and operated for public safety, literary and educational purposes as well as those fostering amateur sports competition or the prevention of cruelty to children or animals.
501(c) (4) groups, including civic leagues and social welfare organizations. These organizations are operated to promote social welfare to benefit the community. The organization’s net earnings must be devoted only to charitable, educational or recreational purposes. The organization must provide evidence it’s structured exclusively to promote social welfare by showing the organization operates primarily to further the common good and general welfare of people in the community.
501(c) (6) groups, including business leagues. A business league is an association of persons having some common business interest, the purpose of which is to promote that common interest and not engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are considered business leagues.
Contributions to domestic organizations exempt under 501(c) (3) are deductible on the donor’s federal income tax return. Contributions to section 501(c) (4) or 501(c) (6) organizations generally aren’t deductible for federal income tax purposes, but could be deductible as trade or business expenses, if ordinary and necessary, in the conduct of the taxpayer’s business.
How do you choose an organization to which to give? You want your donation to support a cause close to your heart and the group to make the most of your gift. There are several ways to make sure your donation is being put to use where you intended and for the purpose you intended.
In general, exempt organizations must make available for public inspection certain annual returns and applications for exemption and provide copies to individuals who request them. Copies usually must be provided immediately in the case of an in-person request and within 30 days in the case of written requests. The tax-exempt organization may charge a reasonable copying fee plus actual postage, if any. Many organizations’ Form 990, Return of Organization Exempt from Income Tax, is available on their Web sites or
www.GuideStar.org. Reviewing the exempt application and Form 990 will answer most of your questions. The application and Form 990 will state the organization’s mission and purpose. In addition, Form 990 for 501(c)(3) and 501(c)(4) organizations describe the three largest program service accomplishments for the filing year.
The proportion of money spent on program expenses versus management and administrative expenses can help determine if an organization constitutes a good fit for getting your donation to the purpose you intended. Watchdog groups have established acceptable proportions of funds dedicated to the program that range from 60 percent to 80 percent. By calculating the program expense proportion, you can determine if it is in an acceptable range and ensure your gift won’t all be consumed on administration or other spending.
Once you’ve found an organization you feel meets your criteria and is deserving of your donation, keep in mind the requirements in place for your donation to be deductible on your federal income tax return. With contributions of cash or checks or other monetary gifts, regardless of the amount, keep a bank record or written communication from the organization showing its name, plus the date and amount of the contribution. For a contribution of property other than money, keep a receipt from the organization that shows its name, the date and location of the contribution and a detailed description of the property.
If the contribution is worth $250 or more, stricter substantiation requirements apply. A deduction for a contribution of $250 or more won’t be allowed without a written receipt from the organization. The written communication should clearly state no goods or services were provided for the donation received. Additional requirements apply when larger sums of money or property are donated.
Charitable giving can be rewarding. Choosing a good organization that aligns with a cause you’d like to support and that you believe will make the most of your donation is important. To learn more about charitable contributions and how they could offer tax savings, consult with a qualified professional who can provide you with additional information and advise you as to your specific circumstances.