Just because something is called a donation, doesn’t mean it yields a charitable deduction. In fact, many charities offer programs wherein participants are required to make a “donation” prior to partaking. When trying to determine whether a donor can claim this payment as a deductible charitable contribution, we need to evaluate all the facts.
The Internal Revenue Code does not provide a definition for what constitutes a charitable gift. Instead, it provides rules regarding the deduction limits, which types of donations are eligible for a deduction, and the substantiation requirements for the donation itself. For the definition of a gift, let’s look to case law. The court system has defined a gift to be something that is:
1. Voluntary in nature, and
2. Motivated by a detached and disinterested generosity.
Using the above definition, any donation that is required, and therefore not voluntary in nature, would fail to meet the criteria for a “gift.” The IRS would most likely view the payment as a program fee, rather than a payment yielding a charitable deduction for the donor.
Some charities tackle this issue by advertising a “suggested” donation instead of a required donation. By removing the donation requirement, it is possible that the amount may qualify as a gift. However, the donor’s charitable deduction may still be limited if they receive something of value in exchange for the suggested donation.
For example, let’s say an organization hosts a benefit concert and advertises a $50 suggested donation to attend, which is the same amount that similar concert tickets are typically priced. An attendee who pays the suggested donation is not entitled to a charitable deduction, since they are receiving something valued at $50 in exchange for the $50 suggested donation.
When determining whether a donation is eligible for a charitable deduction, it can be helpful to ask the following questions:
• Is each participant required to pay the “donation?”
• If a participant does not pay the “donation,” is he/she ineligible to participate in the program?
• Does each participant pay the same amount?
• Is the “donation” amount stated on materials that advertise the program?
If the answers to the questions above are yes, the IRS will likely classify the payment as a program fee rather than a donation. This is because the voluntary nature and generosity elements associated with a gift are missing.
It’s important to remember that it is the donor’s responsibility to determine whether a donation qualifies as a tax deduction. That said, charities should remember that donors often rely on materials the charity provides when determining the charitable deduction for the year. Therefore, charities must be diligent about ensuring that their event information and donor acknowledgement letters are not providing misinformation about potential tax deductions.
Fritz Duncan, CPA is the leader of the Jones & Roth Nonprofit Team and specializes in tax, auditing, and financial review for non‐profit organizations and limited partnerships. Fritz also specializes in affordable housing, including the Low Income Housing Tax Credit.