Deductions for Charitable Contributions Require Documentation

Date February 17, 2020
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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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Employee Stipends: Taxable or Not?

Date January 7, 2020
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Many companies choose to pay stipends to employees as a method of compensating them for incurred business expenses. This is especially true in construction companies, where it is widely viewed as a common industry practice. While the approach of using stipends in this manner is widespread, many construction companies fail to properly plan for and/or execute them, which can result in additional taxes owed by both the company and the employee.

In the simplest terms, a stipend is a monetary advance to an employee that allows an him or her to pay for various business expenses. Depending on how the stipend is structured, it can either be taxable income to the employee, or a non-taxable reimbursement. In order to keep the stipend non-taxable, a company must implement an accountable reimbursement plan, whereby employees complete expense reports proving that all business-related expenses are being reimbursed through the payment of the stipend. If a company does not have an accountable plan, or it is not followed (e.g. expense reports are not submitted or do not provide the appropriate documentation to support the expenses claimed), then the stipend paid to the employee may be re-characterized as taxable income.

One area where companies may run into difficulties with employee reimbursement stipends is in the area use of a personal vehicle for business purposes. The easiest method to use is to base the reimbursement on the number of business miles driven multiplied by the IRS standard mileage rate, which is currently 57.5 cents per mile. If a company provides a stipend to an employee prior to the business usage of the car, the company will need to take great care in reconciling the expense report provided by the employee. If business usage is less than the stipend provided, the employee should reimburse the company for the excess funds received.

It’s clear that establishing an accountable reimbursement plan is essential for any company providing stipends to employees for business expenses. For more information, please contact Richard P. Mishock at RMishock@hbkcpa.com or reach out to your HBK advisor.

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Indiana Dept of Rev Changes Tax Policy on Doc Fees

Date April 2, 2019

The Indiana Department of Revenue has taken a new position regarding whether documentation fees are subject to sales tax. It is effective April 2, 2019.

As always, fees for services performed after the transfer of a vehicle or trailer are not considered part of the sales price; therefore, they are NOT subject to sales tax. (For this purpose, the transfer takes place upon physical delivery as a purchaser takes possession and control of the property, regardless of whether the title has yet been transferred.) The dealer must maintain adequate records noting all services pertaining to the fees charged. The records must also detail any services performed after the transfer in order to be exempted from sales tax. Fees charged for services performed prior to a customer taking physical possession of the vehicle or trailer ARE subject to sales tax. Doc fees have historically been treated as a service NOT subject to sales tax. This is no longer the case and the change stems from the state allowing dealers to charge a “convenience fee” relative to the titling services they offer.

As a reminder, the General Assembly added IC 9-14.13-3 effective July 1, 2016, which established a separate “convenience fee” allowing dealers to charge for services that, in the past, had been excluded from the retail unitary transaction and were reflected by the documentation fee. As such, fees qualifying as separate “convenience fees” are NOT subject to sales tax. While dealers may still charge a separate documentation fee [in addition to the convenience fee], any other services attributable to documentation fees will be considered seller service charges, which are necessary for sale completion as per IC 6-2.5-1-5(a)(3) and these WILL be subject to sales tax.

The bottom line: effective April 2, 2019, a dealer’s Documentation Fees are most likely subject to sales tax.

If you have questions on the Information Bulletin #28S policy changes, please contact Rex Collins at 317.504.7900 or RCollins@hbkcpa.com

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