Donor receipts and fair market value

With tax time quickly approaching, I hope that your organization has sent out its donor receipts for contributions received during 2015 by now.  However, I know that many organizations will not have provided them yet, and I unfortunately also know the surprised look I get from those people who are not aware that they are supposed to provide them at all.

There are many IRS rules surrounding these receipts, and financial penalties associated with breaking those rules.  However, one of the most common errors that nonprofits encounter is failing to properly note the substantial fair market value of any goods or services given to donors in exchange for their contributions.

What is fair market value?

  • The IRS defines it as, “generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.”
  • More plainly speaking, it is what the goods or services would have been worth outside of the charity context.

For instance:

  • You pay $300 for a gift basket worth $250 at a charity auction.  Only $50 is really a charitable contribution.  It would be inappropriate for you to take a deduction of $300 or for the organization to simply list a $300 “donation” on the receipt.  Instead, the organization should provide a receipt that indicates the purchase price less the fair market value of the gift basket.
  • You pay $250 for a ticket to a nonprofit’s annual fundraiser gala.  The actual fair market value of the meal and entertainment you enjoy at the gala is $75.  Again, the deduction-eligible portion is only the excess $175.
  • A local artist gives your organization a free sculpture to sell at your silent auction.  It sells for $600.  Even though your organization paid nothing for the sculpture, it would still be improper to provide a receipt showing a contribution of $600, because that would not account for its fair market value.

Again, there are many aspects to IRS requirements for donor receipts, so it is easy to run into problems.  Be sure to read through the contributions information on the IRS website.  If you really want to go in-depth on the matter, you can go through the IRS’s web-based mini course on the subject, or read through a PDF of the same information at your convenience.

The financial penalties for providing incorrect disclosures can be significant, so it is important to provide accurate receipts.  If you find that you need some guidance, contact an attorney or a tax professional to make sure you doing things properly.

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Please note:  This blog is intended as general educational information only, and should not be considered legal advice or a substitute for consulting a lawyer.