As tax preparation season is upon us, I am starting to receive documents from clients. I have already noticed that some are receiving improper donation receipts/acknowledgement letters. Whether you are creating them, or you’re on the receiving end, if the acknowledgement letter simply states the amount of contributions received/made for the year, it does not pass IRS standards.
First, here is today’s quote by Winston Churchill…. “Success is not final, failure is not fatal: it is the courage to continue that counts.” So I say …. Keep on going. Don’t stop. Continue on the path you feel God is leading you down.
Now, let’s dive into today’s topic and learn about proper donation receipts from the IRS’s perspective. When you file your taxes, every return starts with one of two deductions. Either the Standard deduction (which means you take the automatic amount the government allows for your filing status) OR you can itemize your deductions if you think they will add up to more than the Standard deduction.
With the 2023 Standard deduction being $13,850 for single filers and those who are married but file separately, $27,700 for those who are married and file jointly, and $20,800 for those filing the head of household status, it is estimated that roughly only 30% of taxpayers will actually itemize their deductions. One of the largest calculations you can take for an itemized deduction are Charitable donations. So, that is where we are going to camp out today since, according to the Interdisciplinary Journal of Research on Religion, congregations in the US collect around $74.5 billion in donations each year. Regardless of your church's share of that amount, we need to make sure that we are acknowledging those donations correctly.
Let’s start with what the IRS has to say about this. I will be referencing Publication 526: Charitable Contributions and Publication 1771: Charitable Contributions ~ Substantiation and Disclosure Requirements.
Since most taxpayers make contributions to churches by cash, check or credit cards, that’s the type of requirements we’ll cover today. According to IRS publications, the IRS imposes recordkeeping and substantiation rules on donors making charitable contributions and disclosure rules on charitable organizations that receive contributions from donors.
First, let’s look at the Donor’s responsibility:
Donors must have a record of the contribution or a timely written communication for any monetary contribution before they can claim a charitable deduction on their federal income tax returns.
The IRS considers Cash contributions to include donations made by cash, check, electronic funds transfer, online payment service, debit card, credit card, payroll deduction, or a transfer of a gift card redeemable for cash.
Donors can't deduct a cash contribution, regardless of the amount, unless they keep one of the following:
A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:
A canceled check
A bank or credit union statement
A credit card statement
An electronic fund transfer receipt
A scanned image of both sides of a canceled check obtained from a bank or credit union website
A receipt (or a letter or other written communication such as an email) from the qualified organization showing the name of the organization, date of the contribution, and amount of the contribution.
Payroll deduction records
However…Donors are responsible for obtaining a contemporaneous written acknowledgment from a charitable organization for any single monetary contribution or noncash contribution valued at $250 or more before donors can claim a charitable deduction on their federal income tax returns.
What that means is that the IRS says it is the donor’s responsibility to make sure they receive the written acknowledgement letter from the church if they donate $250 or more. That responsibility should not be put on the donor. It’s kind of weird that the IRS says it's the donor’s responsibility, yet puts in the Publications as requirements for the written acknowledgement from the church.
With that being said, let’s move onto the Church's responsibility:
The written acknowledgment required to substantiate a charitable contribution of $250 or more must contain the following information:
Name of the organization; date of donation received
Amount of cash contribution; include the check # if applicable
Statement that no goods or services were provided by the organization, if that is the case;
Description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution; (example Youth Banquet dinner ticket cost) and
Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
The IRS also says the written acknowledgement must be Contemporaneous. For the contemporaneous written acknowledgment to be considered contemporaneous, a donor must receive the acknowledgment on or before the earlier of:
The date on which the donor files the donor’s individual federal income tax return for the year of the contribution; or
The due date (including extensions) of such return.
NOTE: Charities typically send written acknowledgements to donors no later than January 31 of the year following the donation. This means that a taxpayer cannot file their tax return on February 21, 2024 and claim donations given if they have not received their contribution statement or other records to prove the amount donated.
Although the church may have more flexibility when it comes to the donor acknowledgement letters, most churches choose to send a formal business-style letter. This type of letter typically follows this simple outline –
Printed on letterhead (or PDF with letterhead). Your letterhead should feature your organization’s logo and address.
The date the letter is written and signed.
The donor’s name and address. This is usually found under the date.
A salutation. “Dear Ms. Donor.” Make sure to personalize it with your donor’s name! (a lot of software now makes that easy working from a mailing list)
One or two brief paragraphs stating how grateful you are for their gift by including some concrete examples of how their donation has been/will be put to work toward your mission.
Depending on the number of donations to report, put them in the body of the letter or use this as a cover letter and list the contributions on a separate page.
A closing remark such as “Sincerely,” “Warm Regards” or “Our Many Thanks.”
Signature. Your donor acknowledgement letters should be signed by the church Treasurer or Administrator. They should NOT be signed by the Pastoral staff as they should not be involved in knowing how much your members are donating. For an added touch, ask the signing individual to sign it themselves in blue ink so the recipient knows it's an original signature and not a photo-copy.
A personal note. Want to take your letter to the next level? Ask those signing the letters to also include a quick, hand-written note of gratitude customized to each donor.
This is the most common way to acknowledge donors. You can choose to send your letters through the mail or as an attachment via email. Once you get a process in place to tackle this task you’ll be set for this each year.
And that is going to wrap up another episode my friend. I pray that the information provided helps make sure you are getting the correct written acknowledgements into the hands of your members and regular donors.
So until next time my friend, let’s all strive to make an impact and not just an income. Take care and remember to always look your best, do your best and be your best.
To hear the podcast episode for this topic check out the Bookkeeping with a Purpose podcast on your favorite podcast app or here.