by Salmon Sims Thomas CEO and Managing Partner, Bill Sims
Most contributions are straightforward and easy to understand and record. However, that isn’t always the case, some are more complicated. As a result, they require a closer look and understanding to make sure they are recorded properly.
While accounting rules are pretty simple to apply, tax considerations are much more ‘in-play’ when determining if a “donation” meets the criteria of a charitable contribution – for tax purposes. If a donation doesn’t meet this tax definition, the nonprofit organization (NPO) will be hard-pressed to record it as a contribution because it won’t be able to give a donation ‘credit’ to the donor.
Valuation is a key component of this discussion, and we’ll get to it below. However, let’s first talk about control – specifically the donor giving up control to the NPO. If the donor does not relinquish control to the NPO, then there’s no contribution. This relinquishment of control also includes no conditions put on the gift by the donor. The definition of “condition,” for this purpose, means something else must occur before the NPO is entitled to the gifted asset. A good example is being named as a beneficiary in a will. As long as the person is still alive, the “gift” is conditional based on the person’s death. Until they die, they can change their will and remove the NPO from it.
Conditional is not to be confused with a restriction. Restrictions are defined as being either time or purpose. Time restrictions are those associated with pledges/promises to give at a future date. Purpose restrictions are just that – they restrict the use of an asset for specific purposes. These purposes should be within the NPO’s IRS-approved mission so as not to jeopardize their exempt status. (A small note here on purpose restrictions: donors cannot generally “restrict” their donations for specific individuals. That’s tantamount to a gift, which the donor could give directly to the individual without going through the NPO. Gifts are not deductible to the donor, so be careful allowing a donor to use the NPO to get a tax deduction for what is really a non-deductible transaction). In both cases, the gift is restricted to its time or purpose, but it is unconditional, meaning it’s certain to occur with the passage of time or by the NPO using it for the designated purpose. One last item relating to donor benefit; in most cases, the donor receives nothing in return for their gift – it is a nonreciprocal exchange.
However, there are occasions where a “contribution” includes both a charitable component and return benefit to the donor. The common example is a special event/fundraiser where there’s a dinner involved. In this case, when the donor purchases attendance to the special event, they are paying for the meal plus an amount above the meal’s value; the latter is a donation. Recording the entire price for the ticket as ‘special events revenue’ is appropriate. Then, for financial statement presentation, the value of the benefit that the donor received (i.e. the meal) is netted against the ticket sales revenue paid by the donor/attendee.
The last item to be discussed is the determination of value. In most cases, donors contribute cash. That asset is easy to value, and there’s not an issue in determining fair value. Publicly-traded securities also have a readily determinable value, so again no issue. (A word of caution when securities are contributed: if the NPO doesn’t convert the securities to cash immediately, there will likely be a gain or loss between the value when donated and when the securities are sold. The NPO should use a consistent way of valuation for acknowledgement to the donor. A typical approach is the average of the share price for the day of donation.) A typical challenge, for valuation purposes, comes from non-cash assets. Examples include real estate, vehicles, interests in non-publicly-held entities, and jewelry. The NPO will need to somehow determine the value to record the contribution on its books; typically, if the asset is of significance, an appraisal will be obtained. If the asset is held for a period of time, there likely could be a change in value between time of donation and ultimate sale or conversion to cash. Accordingly, a gain or loss will need to be recognized in the period in which the sale occurs.
However, a word of caution regarding acknowledgment to the donor: the NPO should certainly provide a charitable contribution acknowledgement to the donor. But the NPO should NOT tell or acknowledge the value; rather let the donor determine that amount. (The NPO doesn’t want to be viewed as an “expert” for valuation purposes, and giving the donor that amount could be construed as such.)
There are other tax documentation/substantiation issues when non-cash, non-publicly traded securities are involved, but those are beyond the scope of this article.
For more information please contact Salmon Sims Thomas our team is ready to serve your needs.