ISSUE

Tax-exempt organizations have a great opportunity in the fundraising arena that some institutions are not utilizing.  This is the “token exception.”

 

SITUATION

Troas Bible College (TBC) 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.  TBC’s Controller calls us to ask about a fundraising campaign they are conducting this summer.

A Christian publisher has agreed to provide TBC with a special printing of a popular book at a special price.  The books will include TBC’s name and logo on the cover and a note on the inside of the book jacket wherein the author talks about his love for TBC.  In the fundraising campaign, donors who contribute $100 or more during a given period of time will receive a free copy of this book.

TBC’s Controller asks about how to receipt these donors.  She knows that, for “quid pro quo” donations (a contribution made by a donor in exchange for goods or services) greater than $75, the Internal Revenue Code requires TBC to provide a written acknowledgement to the donor that states 1) the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization and, 2) provides the donor with a good-faith estimate of the fair market value of the goods or services.

Sample verbiage on a non-cash donor receipt of this nature might be:  “Thank you for your cash contribution of $150 that Troas Bible College received on June 14, 2018. In exchange for your contribution, we gave you a book with an estimated fair market value of $30.” [adapted from IRS Publication 1771]

However, if the cost of each book to TBC is less than the 2018 limit for “low-cost articles” ($10.90 for 2018), no “quid pro quo” receipt would be required and the full contribution would generally be deductible.  This can provide an added incentive for donors to give (and receive) as part of a fundraising campaign.  TBC should carefully document their cost of the books in case the IRS questions their position.

In the 2018 “Tax Trends” project survey, over 74% of surveyed schools noted that they’d utilized the “token exception” over the past three years.  But, we constantly encounter schools that are not aware of this opportunity.

 

RULES

From IRS Publication 1771 (page 3):

Token Exception — Insubstantial goods or services a charitable organization provides in exchange for contributions do not have to be described in the acknowledgment.

Goods and services are considered to be insubstantial if the payment occurs in the context of a fund-raising campaign in which a charitable organization informs the donor of the amount of the contribution that is a deductible contribution, and:

  1. The fair market value of the benefits received does not exceed the lesser of 2 percent of the payment or $X,* or
  2. The payment is at least $Y,* the only items provided bear the organization’s name or logo (e.g., calendars, mugs, or posters), and the cost of these items is within the limit for “low-cost articles,” which is $Z.*

Free, unordered low-cost articles are also considered to be insubstantial.

Commentary:

The “asterisked amounts” are $109 (X) for 2018 or the amount contributed to the charity was at least $54.50 (Y) for 2018 and the donor receives only “token benefits” (e.g., bookmarks, calendars, mugs, posters, tee shirts, etc.) generally costing no more than $10.90 (Z) for 2018.

 

BOTTOM LINE

  • Internal Revenue Code Section 6115 stipulates the requirements for receipts involving “quid pro quo” contributions.
  • Token items can generally include books, pens, mugs, t-shirts etc. that are marked/stamped with the charity’s logo and/or name.
  • Note that the token amounts represent the cost to the charity not fair market value.
  • IRS Publication 1771, Charitable Contributions (Substantiation and Disclosure Requirements can provide great insight (in a small package) with regard to what you need to provide donors.

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.

© 2018 Christian College Resources, Inc.