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Charitable Donations: The World of Quid Pro Quo

Posted By Celeste Viator, Hannis T. Bourgeois, LLP, Thursday, April 28, 2016
 

A contribution to a charity isn't always a tax-deductible contribution for the donor, as in the case of "quid pro quo" donations. This exchange of one thing for another happens when a charity receives a payment that includes a contribution and, in return, provides the donor with goods or services valued for less than the total payment.

For example, a person might make a donation to the fictitious Parakeet Rescue Association of America by buying tickets to the group's charity ball. But he or she gets something back in the form of a "free" gourmet dinner and top-notch entertainment. Only the amount over and above the value of the dinner and entertainment is considered a charitable contribution.

Acknowledgment and Disclosure

Quid pro quo arrangements create an obligation for the charity: You may ignore payments of less than $75, but if your organization receives more than $75 and provides a benefit to the donor, you must advise the donor that it's a quid pro quo contribution.

With such contributions, donors can deduct only the amount in excess of the value of the goods or services they receive in return. And the charity must put in writing:

  • That the amount of any tax deductible contribution is limited to the excess of the contribution over the value of the goods and services provided in return, and

     

  • A good faith estimate of the value of the goods or services provided in return.

    The written acknowledgment must be provided when the donation is solicited or when it's received. For example, if you're holding a charity dinner each ticket sold should disclose the tax-deductible portion of the ticket price.

    Additionally, the disclosure must be in a readily visible format — in other words, no small print. Examples can be found in IRS Publication 1771, "Charitable Contributions — Substantiation and Disclosure Requirements."

    Your organization could be penalized for failing to furnish the proper acknowledgment and disclosure. Fines are $10 per contribution, not to exceed $5,000 for the fundraising event.

    The Quid Pro Quo Amount

    A key task for the charity is to value the goods or services. Let's say your organization takes a group of supporters to a high—end restaurant and pays for their meals. The supporters then make large donations. Determining quid pro quo is fairly simple in such cases: The amount your organization paid for the meal would be considered the fair market value, and only the amount of the contributions in excess of this value would be a tax—deductible contribution for the donor.

    It's not as easy when some of the items given away have been donated to your organization. What would happen, for example, if your charity put on a gala dinner with live music, and the banquet facility charged you a reduced amount for the food as its contribution, and the band performed at no cost?

    To establish the value to be reported to the donor, you must determine what it would cost someone to attend a similar event. In this instance, you'd need to research comparable costs at local restaurants or hotels for a dinner with entertainment. Or you could ask the banquet facility and the band to provide you with the value of the food and services they provided at no cost.

    Charity Auctions

    All items auctioned at a charity auction (silent or regular) must have a value placed on them. The charity should ask the donor to put a value on the item unless it's readily apparent, such as with a $50 gift certificate. The value should be the amount that a willing buyer would pay for the item in an "arm's length" transaction — that is, in the marketplace.

    The charity can then publish the item's value on bid cards or in a catalog of auction items. This serves as the acknowledgment, and the buyers will be entitled to a deduction for the amount paid in excess of that value.

    When Reporting Is Unnecessary

    There are a few instances when quid pro quo reporting isn't necessary:

  • Token exception. The contribution is for $52 or more and the goods cost less than $10.50, or the value of the benefit to the donor doesn't exceed 2% of the donation or $105, whichever is less,

     

  • Membership exception. Membership benefits (such as free admission or free parking) are provided, but the annual membership fee is $75 or less, and

     

  • Intangible religious exception. Religious benefits, such as religious services or classes, are provided by an organization operated exclusively for religious purposes (excluding travel, education and consumer goods).

    In other situations, it's safer to report quid pro quo than not.

    Crossing All the Ts

    Holding fundraising events is a sure-fire way to supplement your organization's income. But you need to understand your reporting obligations if you're providing goods or services in return. Talk to your tax adviser about your specific events and how you should disclose the details.

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