One aspect of my practice that I really enjoy is helping nonprofit organizations achieve exemption from federal income tax. The exemption process involves the filing of an application with the IRS and a review process that can take months. A question I often hear from clients is how to acknowledge donations received during that review period.
The IRS permits nonprofits to treat themselves as tax-exempt while their applications are pending. So, once an application is submitted to the IRS, an organization can, in good conscience, provide donors with acknowledgments of their donations. If the organization ultimately qualifies as tax-exempt, the donations will be tax-deductible.
On the other hand, if the organization ultimately does not qualify, the donations will not be tax-deductible. Accordingly, the prudent approach would be for nonprofits whose applications are pending to include in donor acknowledgments a statement to that effect.
Regardless of whether such a statement is included, the acknowledgment of a cash contribution needs to state the amount of the contribution. The acknowledgment of a non-cash contribution needs to include a description, but not the value, of the non-cash contribution. If the donor received “substantial” goods or services in exchange for the donation, then the acknowledgment needs to include a good-faith estimate of the value of those goods or services. (The IRS publishes guidance defining what is “substantial.”)
If you have any questions regarding the operation or governance of your nonprofit, visit our website or give us a call at (248) 477-6300.