Author: Ketel Thorstenson, LLP

The 1040 form has become very comprehensive over time. Almost everything that happens in your life can have an effect on your tax return, from a new child, or getting married to a death in the family, major illness, becoming a volunteer for a charitable organization or any number of other things. What follows may not address all of life’s circumstances but it is a good place to start when trying to decide what paperwork is necessary for your tax preparation.

Individuals typically provide donations in the form of monetary or donated property.  These contributions benefit the charitable organization and also provide a tax deduction to the donor.  In order for this tax deduction to be allowed, the IRS has specific requirements for the charitable organization to follow.  Do you know what all of the requirements are?  Acknowledging donations is not only required by the IRS, but also provides a means for an organization to say ‘thank you’.

There are many ways in which an individual can donate to a charitable organization.  We will focus our discussion on two main ways: monetary and property.

Monetary
The IRS requires a donor to maintain a record of their contribution or a written communication from the charity in order for the amount to be deducted on their individual tax return.  A record of their contribution could be in the form of cancelled check or, for payroll deductions, a pay stub or other employer-furnished document showing the amount withheld.  If a donor makes a single contribution greater than $250, written communication from the charity is required.

Donated Property
Individuals who donate property are allowed to deduct the fair market value of such property as of the date of the donation. Donated property can range from clothing and toys to vehicles, artwork or land.  The value of the property is
the responsibility of the donor for purposes of determining the amount of the deduction.  The charitable organization
should always provide acknowledgements; however, the acknowledgement should never include an estimated fair market value. See next quarter’s article regarding Considerations When Receiving Donated Vehicle for more details.

Requirements
The following items are required to be included in the written communication from
the charity:

1. Name of the organization, including a statement that the organization is a charity recognized as tax-exempt by the
IRS under Section 501(c)(3).

2. Date of the donation.

3. Acknowledge the amount.
a. If cash, include the amount received.
b. If donated property, include a description (but not the value) of the non-cash contribution.  The value of the
non-cash contribution is the donor’s responsibility.  For example:

Thank you for the 200 shares of IBM stock donated on December 31, 2013.

4. Statement that no goods or services were provided by the organization in return for the contribution, if that was the
case.
a. If any goods or services were provided (referred to as a quid pro quo contribution), include a description and
good faith estimate of the value of the goods or services.  For example, an individual paid $100 to attend an
annual gala event to include dinner.  (See exceptions to this rule outlined below.)  The acknowledgement could
state,

For federal income tax purposes, you can deduct as a charitable contribution the price of this ticket less its fair
           market value. We estimate the fair market value of this ticket to be $40, so your charitable contribution is $60.

A penalty is imposed on a charity that does not make the required disclosure in connection with a quid pro quo
contribution of more than $75. The penalty is $10 per contribution, not to exceed $5,000 per fund-raising event
or mailing.

Other Comments
Thefollowing summarizes some of the other nuances of these requirements:

• Acknowledgement is required for each donation greater than $250.  In lieu of this, the charity can provide an annual statement of all giving.
• Acknowledgements are typically sent to donors no later than January 31st of the year following the donation.  A donor must receive acknowledgement by the earlier of: the date the donor files his/her tax return or the due date of the extended tax return in order for the individual to deduct the contribution.
• Although no financial penalty to the charitable organization exists for not providing the written acknowledgement, there could be a financial or public relations impact if the donor was unable to deduct the donation on their tax return and then, consequently, decides not to donate again.
• Acknowledgements can be provided in written format, such as letters, postcards or computer-generated forms, or they can be provided electronically.
• What are the requirements if a donor requests not to be reimbursed for an expense?  Is that considered a charitable
• contribution?  Yes.  The rules are the same as above.  For example, a committee member elects to pay his/her own way to a conference for the benefit of the charitable organization.  The donor should receive a written acknowledgement of this donation. As it was a noncash donation, only a description would be provided in the acknowledgement.
• There are a few exceptions to providing the fair value of goods or services received.  See those exceptions outlined below:
  a. Token Exception – Insubstantial goods or services provided by a charitable organization in exchange for
  contributions do not need to be reported. The amount considered insubstantial is adjusted for inflation
  each year.  According to the IRS’s 2014 inflation adjustments regarding quid pro quo contributions, to
  qualify as token goods or services, they must cost the organization no more than $10.40, and the
  contribution received must have been at least $52.

  For example, if a charitable organization gives a water bottle with its logo and that cost is less than
  $10.40, the organization does not need to provide a statement with the fair value of the goods or
  services received for donors who contributed more than $52.  The individual would receive the full $52
  deduction on their tax return.

  b. Membership Benefits Exception – An annual membership benefit is also considered insubstantial when
  provided in exchange for an annual payment of $75 or less and consisting of annual rights and privileges,
  such as allowing free admission to workshops.

If your organization has any specific questions regarding acknowledgements to donors, please feel free to contact any one of our non-profit specialists.

FORM 1099 REQUIREMENTS:

When Do You Need to File Form 1099?

The following are the most common situations requiring filing of Form 1099:

You paid more than $600 for services, rents, director fees, prizes, or awards to nonemployees

You paid more than $10 in royalties

You paid dividends and other distributions on stock of $10 or more

You paid interest of $10 or more

This list is not all inclusive; please refer to the 1099 instruction booklet for more information.

Required Form W9.

If you are required to submit an information return, you must provide that person’s TIN (Taxpayer Identification Number)on the return.  A penalty will be charged to those who cannot demonstrate that they made a proper attempt to obtain correct numbers.  Use Form W-9 to request a TIN from a payee. Proper matching of a TIN and name is important.  When using a SSN, the individual’s name must be reported as the recipient’s name, when reporting a TIN, the entitie’s name must be used as the recipient’s name to prevent future correspondence from the IRS.  Backup withholding of 28% may be required if the payee fails to furnish his or her taxpayer identification number.

 When to File?

Form 1099 must be furnished to recipients by January 31,  2014 for the 2013 reporting year. These forms must be filed with the IRS on or before February 28, 2014 or by March 31, 2014 if filing electronically.

Penalties!

There are penalties which can be imposed for failing to comply with reporting and filing requirements for Forms 1099, such as failing to file timely or electronically when required, failing to include all information required, or incorrect information included on the return.  The amount of the penalty is based upon when the correct information return is filed:

1. $30 per information return if correctly filed within 30 days
2. $60 per information return if correctly filed more than 30 days after the due date but by August 1
3. $100 per information return if filed after August 1^st or not filed at all

Reclassified Workers?

Employers will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a non-employee. The employer may be able to reduce their liability using special rates in IRS Code Section 530 for the employee share of taxes.  The employer must have filed Forms 1099 in order to get this tax relief.

Questions?

            Contact our accounting services department.  We are glad to help!

As described in Part I through V of our previous articles, 14 different compliance requirements could have a direct and material effect on federal grants received by governmental or nonprofit organizations. Organizations that utilize Federal programs to purchase capital assets must comply with two requirements, Equipment and Real Property Management and Real Property Acquisition and Relocation Assistance. Click here to learn more.

Equipment and Real Property Management: The Equipment and Real Property Management requirement focuses on the purchase and sale/disposal of capital assets purchased with federal funds. The requirement also establishes the documentation and procedures necessary to manage these assets. Detailed information of these requirements can be found in Office of Management and Budget Circular A-102 Common Rule, program legislation and/or regulations, and the grant award agreement terms and conditions.

For equipment with an acquisition cost over $5,000 and a useful life of more than one year and for all real property, adequate records must be maintained to track the assets. Adequate records for each asset should include the funding source used to purchase the equipment, purchase cost, and the date of purchase. These records should be updated as purchases and disposals occur. Assets should be used only for the Federal program they are purchased for. All equipment and real property must be safeguarded and maintained to ensure usability. At least biannually, a physical inventory should be performed and reconciled to the equipment records.

Organizations that dispose of real property and equipment having a fair market value of more than $5,000 must forward any proceeds to the Federal program (allocable based on the percent of Federal participation in the original purchase). When selling federal assets, organizations should attempt to obtain the highest possible return. For real property, any disposal must have the prior consent of the awarding agency. If equipment or real property is no longer necessary for federal purposes, but will be retained by the organization, the fair market value of the property should be paid to the Federal program.

Proper internal control procedures within the organization should ensure these compliance requirements have been met. Controls should include identifying those within the organization who will maintain equipment and real property records. Management should review records to determine completeness and accuracy. Organizations should further ensure the safeguarding of assets through the use of inventory tracking tags that are permanently affixed to assets, as practical, and securing assets using locked gates and doors.

Real Property Acquisition and Relocation Assistance: The Real Property Acquisition and Relocation Assistance requirement focuses on the uniform and equitable treatment of persons displaced by federally assisted programs from their homes, businesses, or farms. Further documentation of requirements can be found in the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended.

This requirement outlines what is required of the organization to ensure compensation offered to those displaced by a Federal program is equitable. The use of qualified independent appraisers, followed by a third-party review of appraisals, are used to calculate the compensation offer. Further allowances are also available to the displaced parties.

This requirement is uncommon for organizations, so read the detailed requirements carefully to ensure the proper procedures are followed when acquiring property in which individuals or organizations are displaced.

The 14 federal grant compliance requirements are not independent of one another. The purchase of equipment and real property is affected by the above two requirements, as well as the following related requirements: Activities Allowable or Unallowable, Allowable Costs, Procurement and Suspension and Debarment, Davis-Bacon Act, and Reporting. Each of these compliance requirements is described in more detail within other parts of our series on Grant Compliance.

Look for upcoming newsletter articles providing specific details on each of the 14 compliance requirements. Please contact Traci Hanson, Shelley Goodrich, or Sandra Weaver with specific questions.