The Link Between Donor Acknowledgment Letters and Taxes

For Tax Purposes, What Information Should We Include?

There's more to a donation thank you letter than just saying thanks. They also affect tax deductions.
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There are two sides to thanking a donor.

First, you need a warm thank you letter, but you also must include legally required information so that donors can document that they gave a tax-deductible donation to your charity.

The IRS requires public charities to send a formal acknowledgment letter for any donation that is more than $250. The donor will use this letter as proof of his or her donation and right to a tax deduction.

Most charities send an acknowledgment for all donations, even small ones.

Both goals, a heartfelt thank you and satisfying the legal requirement, can be accomplished at the same time or separately. Most charities manage to achieve both requirements within one letter.

When you should acknowledge a donation for tax purposes

The IRS says that acknowledgment must be made “in writing, at the time of solicitation or when the payment is received, and in a way that will come to the attention of the donor.” (See IRS Publication 1771)

To be on the safe side, plan to send an acknowledgment to the donor no later than January 31st of the year following the donation.

In reality, best practice suggests that charities send an acknowledgment as soon as possible after the gift is received. Some charities also send a summary of a donor’s contributions for the previous year by the end of January.

What you must include in the acknowledgment

  • Your organization's name.
  • A statement saying that you are a 501c3 tax-exempt organization.
  • The date the donation was received.
  • The amount of the cash contribution (cash means checks, credit card, and payroll deduction).
  • A description (but not value) of non-cash contribution. The donor estimates the value of non-cash contributions when reporting them to the IRS on his tax return.
  • A statement that no goods or services were provided by the organization, if applicable.
  • A description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution. An example could be a dinner where some of the money pays for the meal while the rest is a donation.
  • A statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible benefits if applicable. An example might be a small gift valued less than $75. Examples are a mug or tote bag with the organization’s logo.

Does the acknowledgment have to be a letter, or do I have to use a particular form?

The IRS does not require or furnish a particular form for the acknowledgment. And it can be a written letter or an email.  Some charities send an email acknowledgment at the time of the gift, especially if the donation was made online, and then send a written summary the following January.

What will happen if my organization doesn’t provide a proper acknowledgment?

The IRS has denied tax deductions to donors who cannot offer proper acknowledgment for their donations to a charity.

The “Chronicle of Philanthropy” reported on this in its article, IRS Crackdown Puts Focus on Gift Records.

  In one case, the judgement hinged on the acknowledgment not being timely enough and lacking the required language.

TIP: Develop your acknowledgment language and have it assessed by an attorney who specializes in nonprofit matters. Then use the same language consistently. 

Some examples:

There is no reason your organization cannot provide a warm thank you that will encourage your donors to give to you again and fulfill your obligation to provide an IRS acceptable acknowledgment of the donation.

Although acknowledgment language should be suited to each charity, here are two examples of statements that meet all the requirements.

The first came at the end of a written letter sent by mail; the second was part of an email thank you.

As a 501c3 charity, tax laws require us to notify you that this letter is the official acknowledgment of your gift. Also, we are required to certify that you received no goods or services in consideration of this contribution; therefore, the full amount of your gift is tax-deductible. Thank you!

Partners In Health, a 501 (c)(3) not for profit organization, has not provided any goods or services, in whole or in part, to you in consideration for this voluntary cash contribution. If you wish to claim the tax deductibility of this gift in the U.S., please retain this acknowledgment letter for your files. Partners In Health's EIN number is xxxxx.

Resources:

IRS Publication 1771

GrantSpace Knowledge Base

National Council of Nonprofits