The Nonprofit FAQ

What is 'substantiation'? Why should donors care?

IRS Publication 1771 (http://www.irs.gov/pub/irs-pdf/p1771.pdf) explains in detail the rules about tax deductions for donors. The IRS uses 'substantiation' to describe receipts and acknowledgements that a taxpayer can use to demonstrate that a gift qualifies as deductible from personal income taxes. For gifts of cash, a taxpayer must have a bank record or a written receipt from the recipient organizations. A receipt must show the date, the amount of the gift, and the name of the organization that received it. The requirement for a written confirmation was extended to all gifts by the Pension Protection Act of 2006 (H.R.4). Previously, the requirement applied only to gifts of more than $250. A receipt also needs to describe anything the donor got in return for the gift (except 'insubstantial' recognition items), or say clearly that nothing of value was exchanged. If the donor doesn't have such a receipt, the deduction may be disallowed in a tax audit by the IRS. Email acknowledgements—such as the ones sent by online donation systems—usually qualify. But an entry in the taxpayer's checkbook won't. The acknowledgement for a gift has to come from the organization that got the gift and it needs to be clear that the transaction was a bona fide gift (and not, for example, a tuition payment). When the gift isn't money, the acknowledgement should describe what was given clearly, but not state a value. (Cars, boats and the like are a special case; see http://www.nonprofits.org/npofaq/18/69.html. More complicated rules about appraisals apply to large gifts, especially when the gift will not be used by the recipient in its own program.) H.R.4 also set new rules about gifts of household goods and clothing and changed the limits for required appraisals and other details. Checking into the current requirements before taking a tax deduction for any gift made after the summer of 2006 is a good idea. Posted 10/5/05; revised 1/30/07 -- PB