Issue

Cash gifts to employees at Christmas – or anytime during the year – are taxable to the employee, require payroll taxes to be paid, and are includable on Form W-2.

Situation

Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  They are required to file Form 990 annually.
MBC held a banquet where they charged $100 per ticket.  At the banquet, MBC’s leadership gave a summary of the great work they’d done in the previous year and served a catered meal.  MBC’s Director of Finance calls to ask how much, if any, of the $100 might the donor/attendees deduct as a charitable contribution?

Rules

From IRS Publication 557:
Quid pro quo contribution. A contribution made by a donor in exchange for goods or services is known as a quid pro quo contribution. Your charitable organization must provide the donor a written statement informing the donor of the fair market value of the items or services it provided in exchange for the contribution. Generally, a written statement is required for each payment, whenever the contribution portion is over $75.

Good faith estimate of fair market value (FMV). An organization can use any reasonable method to estimate the FMV of goods or services it provided to a donor, as long as it applies the method in good faith.  The organization can estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued.

From IRS Publication 1771:
A required written disclosure statement must:
•    Inform a donor that the amount of the contribution that is deductible for federal tax purposes is limited to the excess of money (and the fair market value of property other than money) contribution by the donor over the value of goods or services provide by the organization.
•    Provide a donor with a good-faith estimate of the fair market value of the goods or services.

An organization must furnish a disclosure statement in connection with either the solicitation or the receipt of the quid pro quo contribution.  The statement must be in writing and must be made in a manner that is likely to come to the attention of the donor.  For example, a disclosure in small print within a larger document might not meet this requirement.

From the 2015 Form 990 instructions (Part V, Line 7a/7b):
Lines 7a and 7b. If a donor makes a payment in excess of $75 partly as a contribution and partly in consideration for goods or services provided by the organization, the organization generally must notify the donor of the value of goods and services provided.

Example. A donor gives a charity $100 in consideration for a concert ticket valued at $40 (a quid pro quo contribution). In this example, $60 would be deductible. Because the donor’s payment exceeds $75, the organization must furnish a disclosure statement even though the taxpayer’s deductible amount does not exceed $75. Separate payments of $75 or less made at different times of the year for separate fundraising events will not be aggregated for purposes of the $75 threshold.

Bottom Line

Make sure you correctly understand the rules for “quid pro quo” contributions.   If you host “banquets” or similar events, you should talk with your skilled, knowledgeable, and experienced tax advisor.  He or she will be able to help your school navigate the intricacies of the reporting requirements.

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.