As a general rule, a taxpayer can deduct the full amount of monetary contributions made to a qualified charitable organization, as long as certain substantiation requirements are met. These donations are typically made "with no strings attached." But what happens when you receive something of value in return? That's when it becomes slightly more complicated.
The IRS refers to such donations as "quid pro quo contributions." In this case, the deductible amount is generally limited to the excess above the fair market value (FMV) of the benefit you receive. For example, if you attend a fundraising dinner at $100 a plate and the FMV of the meal is $40, you can deduct only $60. Note that you must secure a written disclosure statement for amounts above $75, even if your deduction comes to less than $75.
The IRS says that the disclosure statement must meet both of these requirements:
- Specify that the deduction for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the FMV of goods or services provided by the charity.
- Provide a good faith estimate of FMV of the goods or services received by the donor.
However, no disclosure statement is required if you receive some trinkets of "insubstantial value" from a charity or you receive an intangible religious benefit in return. Thus, a taxpayer doesn't have to obtain a disclosure statement for a keychain with the charity's logo on it or for attending a religious ceremony when there is no admission charge.
The IRS also specifies that a charity may use any "reasonable method" for a good faith estimate of goods or services provided to a donor. It provides the three following examples:
Example 1: A charity provides a one-hour tennis lesson with a tennis professional for the first $500 payment it receives. The tennis professional provides one-hour lessons on a commercial basis for $100. A good faith estimate of the lesson's FMV is $100.
Example 2: For a payment of $50,000, a museum allows a donor to hold a private event in a room of the museum. A good faith estimate of the FMV of the right to hold the event in the museum can be made by using the cost of renting a hotel ballroom with a capacity, amenities, and atmosphere comparable to the museum room, even though the hotel ballroom lacks the unique art displayed in the museum room. If the hotel ballroom rents for $2,500, a good faith estimate of the FMV of the right to hold the event in the museum is $2,500.
Example 3: For a payment of $1,000, a charity provides an evening tour of a museum conducted by a well-known artist. The artist does not provide tours on a commercial basis. Tours of the museum normally are free to the public. A good faith estimate of the FMV of the evening museum tour is $0 even though the artist conducts it.
Be mindful that other tax law provisions relating to charitable donations also apply to quid pro quo contributions. For instance, as with many itemized deductions, your total deduction for charitable contributions is reduced by 3 percent of the excess of your adjusted gross income (AGI) over a specified dollar threshold (but not by more than 80 percent overall). For 2014, the thresholds are $254,200 for single filers and $305,050 for joint filers. Keep your clients appraised of these limits.