ISSUE

It’s “Shark Week” on TV, but as we’ve said before, gift receipting can be as unpredictable and as dangerous as sharks – if you are not diligent and careful.

 

SITUATION

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

The SCC Accounting Team calls us to talk about various tax issues.  At one point, they say, “Hey, we used to really like your “Gift Week” blogs that coincided with “Shark Week” on TV.  Any chance you would start those again?”

“We haven’t done that since 2015, but gift accounting/receipting can certainly “bite” you as bad as sharks.”

“No kidding,” they say, “How about this scenario:  Dr. Garrison is our president.  Dr. G was playing golf with a long-time donor of the college. On the front nine, the donor broke his putter.  At the turn, Dr. G used his SCC-issued corporate credit card to purchase a new Z-Sinker3 putter for $300.  He presents the putter to the donor as a gift from SEC as “a token of our appreciation for your support.”

“Hmmm,” we say.  “That is interesting.  First, how does that align with your accountable reimbursement policy?  Then, because of the $25 business gift limit, Dr. Garrison has incurred taxable income of $275 ($300 – $25 limit).  This is because by using the corporate credit card he has run the expense through an accountable plan. SCC should add this amount to his reportable compensation for the tax year.  Also, if the donor is an Officer, Director, or Trustee (O/D/T) of the organization, the gift would be compensation to him/her – reportable on Form 990, Part VII.

Further, if the donor is deemed a “disqualified person” under Internal Revenue Code section 4958, he/she could be subject to “excess benefit transaction” penalties.  For this situation, SCC’s Controller confirmed that the donor was not a disqualified person.

Interestingly, if Dr. Garrison had gone down to SCC’s Development Department and – out of “donor gift stock” – gotten a Z-Sinker3 and taken it to the donor, there would likely be no tax effect.  That would presume that the donor was not an O/D/T nor a disqualified person.  Also, the donor gift (putter) could not be directly related to a contribution the donor had made. This would generally trigger the quid pro quo rules.”

 

RULES

From IRS Publication 463 (Chapter 3, page 12-13):

Gifts

If you give gifts in the course of your trade or business, you can deduct all or part of the cost.

$25 limit. You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an in-direct gift to that particular person or to the individuals within that class of people who receive the gift.

If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer’s eventual use.

If you and your spouse both give gifts, both of you are treated as one taxpayer. It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts, the partner- ship and the partners are treated as one taxpayer.

Example. Bob Jones sells products to Local Company. He and his wife, Jan, gave Local Company three gourmet gift baskets to thank them for their business. They paid $80 for each gift basket, or $240 total. Three of Local Company’s executives took the gift baskets home for their families’ use. Bob and Jan have no independent business relationship with any of the executives’ other family members. They can deduct a total of $75 ($25 limit × 3) for the gift baskets.

Incidental costs. Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit.

A cost is incidental only if it does not add substantial value to the gift. For example, the cost of gift wrapping is an incidental cost. How- ever, the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial compared to the value of the fruit.

Exceptions. The following items aren’t considered gifts for purposes of the $25 limit.

  1. An item that costs $4 or less and:
    • Has your name clearly and permanently imprinted on the gift, and
    • Is one of a number of identical items you widely distribute. Examples include pens, desk sets, and plastic
  2. Signs, display racks, or other promotional material to be used on the business premises of the recipient.

 

BOTTOM LINE

  • If we are not diligent and careful, contribution receipting, gift acceptance, donor gifts, etc. can be at least as dangerous as swimming through shark infested waters.
  • The IRS has been especially harsh on donor receipting rules over the past few years.
  • Business gift rules apply to not-for-profit organizations and can be the source of employment tax issues if not correctly navigated.
  • IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses can be a great resource for your accounting team.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

© 2019 Moja & Company, LLP.