3 types of donations and how to handle them

I want to share a recent question that frequently comes up in discussion about tax deductions:

Do silent auction donations and sponsorships qualify as a tax deduction? If so, what should our organization give them as proof of their donation?

Yes, silent auction donations qualify, but there are rules about the calculation.  Here are three types:

  1. For sponsorships, an organization must make a ‘good faith’ estimate of the value of whatever the donor receives under each sponsor level.  That part is not deductible.  Their donation is the difference between their sponsorship payment and the fair market value (FMV) of the benefits and goods the organization gave them for their donation.  For example, if the FMV of everything under the $5,000 sponsorship is $1,000, the donor acknowledgment must say ‘you received goods and services valued at $1,000 in exchange for your donation.’  Thus, they have everything they need to compute their actual deduction of $4,000.
  2. If people donate goods for a raffle or silent auction, you send them an acknowledgment letter thanking them for the specific item(s), but you do not assess a value to them.  It is the donor’s responsibility to determine the donation value.
  3. Another type of donation occurs when the donor receives something in exchange for their donation. This is called a ‘quid pro quo’ donation.  If items are of a token value (currently $9.60 per IRS Publication 1771) such as a t-shirt or mug, then the token value doesn’t need to be noted in the gift acknowledgement letter. However, if the items are worth more than $9.60, the organization must let the donor know the FMV of the items they received so they can compute their deductible donation.  Acknowledgement letters need to be provided to donors who contribute more than $75, before taking into account the value of any items provided to the donor.

Your compliance is important because donors need written communication from charitable organizations to claim the contribution on a federal income tax return  Donor substantiation rules are complicated, and require more information on the acknowledgment letter as the amount of the contribution increases.  Contributions of noncash items over $5,000 require an independent appraisal.  Please consult IRS Publication 1771 or give us a call if you are unsure of the exact requirements.