Deductions for Charitable Contributions Require Documentation

Date February 17, 2020
Categories
Article Authors
HBK CPAs & Consultants

People support charitable organizations for philanthropic reasons. But they are also motivated by the tax deduction afforded by the U.S. Tax Code. To substantiate a donation and take the related deduction, a donor is required by the IRS to acquire and keep “contemporaneous written acknowledgement” from the charitable organization. Depending on the amount and type of donation, the required documentation comes in various forms. Practically speaking, charitable organizations are responsible for knowing what type of information must be provided to their donors, though the onus is on the donor to keep the documentation and meet any other recordkeeping requirements.

Generally, contemporaneous written acknowledgement issued by the charitable organization must include the following, as applicable:

  • The amount of cash donated
  • A description of any non-cash property donated
  • A statement and good faith estimate of the value of any goods or services related to the donation of cash or property (if the donor received more than a de minimis item—that is, an amount too small to merit consideration)
  • Acknowledgement if the organization provided intangible religious benefits
  • A description of out-of-pocket expenses incurred by the donor and whether the donor received goods or services in exchange for out-of-pocket expenses

The organization must provide the written acknowledgment when it receives a single donation of $250 or more from a donor. It can be provided at the time of the gift, or once for the entire tax year. The organization is not required to acknowledge separate donations of less than $250 each, even if they total more than $250 for a tax year. However, charitable organizations often send an annual statement to donors reporting their total donation for the year, regardless of the amount.

The IRS does not require organizations to follow a prescribed format for the written acknowledgment. It can be paper-based, such as a statement, letter or postcard, or electronic. To qualify as contemporaneous, a written acknowledgment must be received by a donor before the earlier of the date the donor files their original federal tax return for the year the contribution was made, or the due date, including extensions, for filing their tax return for that year.

In addition to documentation obtained from a donee organization, a donor is also required to maintain written records that include the following:

  • Name and address of the organization
  • Date and location of the contribution
  • Description of the property
  • Fair market value of the property (or cost, if elected)
  • Details regarding contributions of partial interests of property, if applicable
  • The terms of any conditions associated with the contribution
  • For separate contributions of $500 or more, details of how and when the property was acquired and the property’s cost or basis (Cost basis is not required for donations of publicly traded securities.)
  • For separate contributions of $5,000 or more, a qualified appraisal to be obtained and attached to the income tax return

There are also other forms and documentation required for donations of property, such as artwork, securities, vehicles or inventory. Click here to view the chart that summarizes the IRS’s rules for substantiation and documentation.

Donors typically expect to maximize their tax deductions for charitable contributions. Proper documentation is the primary requirement established by the IRS to take the deductions. Organizations can help their donors satisfy this requirement by ensuring they issue the proper acknowledgment.

Organizations or donors with questions about the documentation or substantiation requirements can contact an HBK tax advisor.

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Three Things Contractors Should Do before the Next Downturn

Date January 31, 2019
Categories
Article Authors

Michael Kapics, CPA, CCIFP, and Construction Industry Group Leader for HBK CPAs & Consultants, would like to share the following article written by Brandon Dougherty, CPA, which highlights several important recommendations to assist contractors in maneuvering through turbulent economic times.

In times of economic prosperity, contractors tend to be less concerned about surviving and more prone to taking unnecessary risks. But it is in times of relative security that business owners are in the best position to prepare their companies for the inevitable less prosperous times.

Set Realistic Expectations for Growth
In bull markets, many business owners take advantage of improved margins and increased cash on hand to grow their businesses. While their overall growth strategy might be sound, the implementation of an effective strategy is imperative to ensure that the expansion does not negatively impact the company’s liquidity. Rapid expansion into new, unfamiliar geographic areas or service lines can be disastrous if not carefully planned. Entering new markets can lead to losses in the new initiatives and put additional stress on established operations.

Further, significant increases in the size of individual projects, whether in a new geographic area or a new service line, can appear attractive on the surface because revenues are likely to increase. But higher revenues do not necessarily translate to higher profits. Especially if a company is unfamiliar with the licensing requirements and regulatory environment in a new state or municipality, what sounded like a great idea around the boardroom table, could ultimately destroy what the owners have built through years of dedication and hard work in their field.

When planning for expansion it is essential that the business take a deliberate, measured approach to ensure that the new enterprise does not negatively affect the existing operations. Realistic growth plans typically extend 12 to 36 months and allow the businesses to evaluate and react as things unfold during that time.

Invest in Your Human Capital
Another leading cause of contractor failures relates to performance and personnel issues. A lack of skilled labor has impacted many of the nation’s contractors. While this can make a successful expansion nearly impossible, it is also a struggle for many businesses just trying to maintain their existing levels of operation. Inadequate training or experience, as well as an insufficient quantity of personnel, can halt a growth plan in its tracks. A strong business invests in its workforce through formal, on-the-job training at all levels, and develops a culture of loyalty, ownership, urgency and accountability.

Prudence in Prosperity
Maximizing distributions to owners, deferring the reduction of debt, and other policies that erode a strong financial foundation can squander a company’s opportunity to truly improve its financial footing. Contractors should avoid big-ticket items like planes, boats and equipment unnecessary to the business, as the cost and upkeep of such items can be burdensome when cash flows are tight and margins are compressed by an economic downturn. Resale values are also typically substantially depressed during down markets. Instead of splurging on non-vital items, business owners should invest a portion of their profits in short-term, liquid investments as a way to ensure future cash flow.

Create a Long-Term Succession Plan
Succession planning plays a huge part in the long-term viability of a company. Retirements, unexpected deaths, or other changes in leadership can result in a shift in focus that can lead to abandoning ways of doing business that led to the company’s success. With no plan to ensure continuity in the event that a death or disability could cause a change in the culture, key staff members could become disgruntled, and some of them might ultimately leave a business at a time when they are needed most.

The topic of succession can be an unpleasant conversation, but it is critical for owners of small and medium-size businesses to have a plan in place for what happens when they move on, by choice or otherwise. Having a trusted advisor knowledgeable about succession planning can ensure a thorough and objective analysis of all factors.

Economic downturns, national or local, external or internal, are inevitable. Informed, thoughtful planning is the best way to ensure your business will survive the next one. For questions, please contact Brandon Dougherty of HBK’s Construction Industry group at BDougherty@hbkcpa.com

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Under the New Tax Act: Can Dealers Eliminate Their Related Finance Companies?

Date June 11, 2018
Categories

We are receiving a number of questions from dealers who have heard that the Tax Cuts and Jobs Act of 2017 (The Act) contains changes to tax law which will result in “Buy Here Pay Here” or BHPH dealers no longer needing to use a related finance company (RFC). The Act, the most comprehensive tax legislation since the Reagan era, is very complicated and we expect a significant number of regulations implementing the new law to be issued in the coming months and years.

One of the items contained in The Act is an expansion of the use of the cash method of accounting for businesses. Taxpayers using the cash method of accounting recognize income when cash is received and deduct expenses when paid. In general, the accrual method recognizes revenue when it is earned and expenses as incurred regardless of when payment for those items are received or paid.

Under prior law, there have been limitations on using the cash method of accounting. One of these limitations impacts taxpayers who maintain inventories. Generally, taxpayers with inventories are required to use the accrual method of accounting. Since dealers typically maintain inventories, they are not permitted to use the cash method. This results in dealers being required to recognize all of their sales revenue as income, forcing them to pay income taxes long before the customer has paid for the vehicle. Using an often-overlooked section of the tax code, dealers created RFCs to help alleviate the tax impact of this issue. The use of an RFC, because of the discounts taken, permits dealers to spread the recognition of taxable income over the life of the loan; thereby, more closely matching the tax burden to the cash flow. If dealers could use the cash method, the creation of the RFC would have been unnecessary.

The Act has expanded the use of the cash method so that businesses with gross receipts of less than $25 million dollars may be able to file for an election to use the cash method. This sounds like good news for many BHPH dealers, right? Not necessarily.

The current tax rules relating to the use of the cash method contain a snag for BHPH dealers that they may not have considered. These rules create “cash equivalency.” Under this definition, a dealer who receives an unconditional, assignable promise to pay from the customer, must recognize this as a cash equivalent; therefore, making the entire sale, once again, subject to income tax. The courts and the IRS have both reinforced this cash equivalency theory.

The Bottom Line: The expansion of the use of the cash method under the Act may not solve BHPH dealers’ problems. Accordingly, BHPH dealers must continue the use of RFCs until the IRS issues guidance changing the current rules or dealers risk seeing a significant increase in their tax bills. Contact Rex Collins with any questions you may have about the Tax Act and how it may impact your business.

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