By: Martin M. Shenkman, CPA, MBA, JD
Contributions Don't Have to be Reduced if You Receive Insubstantial Gifts
T-shirts and sweatshirts with charity logos are de rigueur at walk-a-thons, bike-a-thons, and other charitable events. While these might motivate donors to participate, do these ubiquitous small gift items impact contribution deductions? The answer is yes. The general rule is that you have to reduce the amount of your contribution deduction by the fair value of any gift item received from the charity. However, a couple of exceptions are permitted to reduce the reporting burden on charities and taxpayers alike. The gift item (premium) can be ignored for tax purposes if your donation is $50 or more (adjusted annually for inflation -- $89.00 in 2007) and the value of the gift item is not more than 2% of your donation. If you donate $100 and receive a key chain worth $1.90, no problem. If you donate $25 or more (adjusted annually for inflation -- $44.50 in 2007) and the gift item qualifies as a low cost article, it can be ignored. This is an item bearing the organizations name or logo which has a wholesale value of $5.00 or less (adjusted for inflation -- $8.90 in 2007). If you donate $100 and receive a Jacket worth $25.00 at retail, but the charity purchased for $8.50, it can be ignored. Rev. Proc. 90-12, 92-49, and 2006-53.
Resources Addressing The Determination of a Substantial Gift for a Charity
IRS Publication 526
You can deduct your entire payment to a qualified organization as a charitable contribution if both of the following are true.
Rev. Proc. 90-12, 1990-1 C.B. 471
Guidelines are intended to provide charitable organizations with help in advising their patrons of the deductible amount of contributions under section 170 of the Code when the contributors are receiving something in return for their contributions.
Benefits received in connection with a payment to a charity will be considered to have insubstantial fair market value for purposes of advising patrons if the requirements of paragraphs 1 and 2 are met:
1. The payment occurs in the context of a fundraising campaign in which the charity informs patrons how much of their payment is a deductible contribution, and either
2. (a) The fair market value of all of the benefits received in connection with the payment is not more than 2 percent of the payment, or $50, whichever is less, or
(b) The payment is $25 (adjusted for inflation as described below) or more and the only benefits received in connection with the payment are token items (bookmarks, calendars, key chains, mugs, posters, tee shirts, etc.) bearing the organization's name or logo. The cost (as opposed to fair market value) of all of the benefits received by a donor must, in the aggregate, be within the limits established for "low cost articles" under section 513(h)(2) of the Code. (Generally, under section 170, the deductible amount of a contribution is determined by taking into account the fair market value, not the cost to the charity, of any benefits received in return. For administrative reasons, however, in the limited circumstances of this subparagraph, the cost to the charity may be used in determining whether the benefits are insubstantial.)
If a charity is providing only insubstantial benefits in return for a payment, fund-raising materials should include a statement to the effect that: "Under Internal Revenue Service guidelines the estimated value of [the benefits received] is not substantial; therefore, the full amount of your payment is a deductible contribution."
For purposes subparagraph (b) of paragraph 2, an item is a "low cost article" under section 513(h)(2) of the Code if its cost does not exceed $5, increased for years after 1987 by a cost-of-living adjustment under section 1(f)(3). The $25 payment required in subparagraph (b) of paragraph 2 must also be increased, in the same manner.
Rev. Proc. 92-49, 1992-1 C.B. 987
This revenue procedure amplifies Rev. Proc. 90-12, 1990-1 C.B. 471, by providing additional guidelines for charitable organizations engaged in fundraising activities. These additional guidelines generally provide that when charitable solicitations are accompanied by free, unordered, low cost items, the benefits are considered to have insubstantial fair market value, and the charity may advise potential contributors that the full amount of a contribution is deductible under section 170 of the Internal Revenue Code. The following guidelines in new subparagraph (c) are added after subparagraph (b) of paragraph 2 in section 3.01 of Rev. Proc. 90-12: (c) The fund-raising campaign meets the following two requirements:
(1) The charity mails or otherwise distributes free, unordered items to patrons. To meet this requirement, any item received by a patron must not have been distributed at the patron's request or with the express consent of the patron. Any item distributed must be accompanied by a request for a charitable contribution and by a statement that the patron may retain the item whether or not the patron makes a contribution,
(2) The cost (as opposed to fair market value) of all such items, in the aggregate, distributed by or on behalf of the organization to a single patron in a calendar year is within the limits established for "low cost articles" in section 513(h)(2) of the Code.
The other requirements of Rev. Proc. 90-12 must be followed, including the requirement in paragraph 1 of section 3.01 of Rev. Proc. 90-12 that a patron's payment to the charity must occur in the context of a fund-raising campaign in which the charity informs patrons how much of their payment is a deductible contribution.
Internal Revenue Bulletin: 2006-48 November 27, 2006 Rev. Proc. 2006-53
.27 Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns.
(1) Low cost article. For taxable years beginning in 2007, the unrelated business income of certain exempt organizations under Â§ 513(h)(2) does not include low cost article of $8.90 or less.
(2) Other insubstantial benefits. For taxable years beginning in 2007, the $5, $25, and $50 guidelines in section 3 of Rev. Proc. 90-12, 1990-1 C.B. 471 (as amplified by Rev. Proc. 92-49, 1992-1 C.B. 987, and modified by Rev. Proc. 92-102, 1992-2 C.B. 579), for disregarding the value of insubstantial benefits received by a donor in return for a fully deductible charitable contribution under Â§ 170, are $8.90, $44.50, and $89, respectively.
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.