Clients often ask if they can deduct a monetary pledge to a nonprofit. Typically, these pledges occur when a nonprofit is involved in a residential or commercial deconstruction project. Careful tax consideration of pledges is necessary to ensure compliance with the Internal Revenue Code.
Quid Pro Quo Donation
A Quid Pro Quo donation is “a payment a donor makes to a charity partly as a contribution and partly for goods or services. For example, if a donor gives a charity $100 and receives a concert ticket valued at $40, the donor has made a quid pro quo contribution. In this example, the charitable contribution part of the payment is $60.”1 A nonprofit must provide a disclosure statement when a quid pro quo donation is greater than $75.
In the case of deconstruction, nonprofits often provide deconstruction services that would otherwise be performed by for-profit entities. Taxpayers must ensure pledged amounts to nonprofits are reduced by the applicable fee-for-service. The onus is on the nonprofit to provide a disclosure statement, stating the following:
- aInform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the fair market value of goods or services provided by the charity, and
- bProvide the donor with a good faith estimate of the fair market value of the goods or services that the donor received. The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the organization to provide another statement when it actually receives the contribution.2
Good Faith Estimate
What exactly constitutes a good faith estimate? The IRS states, “an organization may use any reasonable method to estimate the fair market value (FMV) of goods or services it provided to a donor, as long as it applies the method in good faith. The organization may estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued.” 3
Let us consider an example that occurs often within the deconstruction industry. Nonprofit A is providing a partial-deconstruction of a client’s kitchen prior to the taxpayer undertaking a renovation. The taxpayer would have needed to contract with their kitchen remodeler to have the kitchen fixtures, appliances, cabinets, flooring, and counters removed, but for Nonprofit A providing that service. The taxpayer makes a monetary pledge of $10,000 along with ceding ownership rights of the property to Nonprofit A. The kitchen renovation team would have charged $2,500 to remove the materials prior to commencing work. Nonprofit A could make a good faith estimate of the fee-for-service valuation at $2,500 because it was a readily determined fair market value. If a fair market value of the service were not available from the kitchen renovators, Nonprofit A could gather quotes from local for-profit contractors, document these values and assign a reasonable dollar value to the service.
Nonprofit A would provide a contemporaneous receipt to the taxpayer with a disclosure statement which stipulates a $10,000 monetary contribution of which $2,500 was a fee for service. The taxpayer could deduct $7,500 on their 1040 Schedule A if an individual or pass-through entity or on their 1120 if a corporation.
Proper Record Keeping
Like all tax-related issues, meticulous records of donation receipts should be maintained by both the taxpayer and nonprofits to ensure compliance with the Internal Revenue Code. There is quite a bit of confusion regarding pledge amounts and taxpayers are often informed they may deduct the entire pledge. An understanding of the quid pro quo concept should provide guidance for CPAs, taxpayers, and nonprofits.
Deconstruction projects accomplish significant diversion of waste away from the landfill and towards reuse. We must ensure tax hiccups do not aggravate the successes within the deconstruction and reuse industry.
