Monday, February 24, 2014

Impact of IRS 990 Rule Change for Donated Goods and Services

Effective with  the 2013 instructions, discounts on services or use of goods  can no longer be claimed as contributions,  according to the 990EZ instructions, p11, Section B2:

"B2. Donations of services or use of property Do not include the value of services donated to the organization (such as the value of donated advertising space, broadcast air time (including donated public service announcements), or discounts on services), or of the free use of property (materials, equipment, or facilities) as contributions on line 1."

As in all things relative to the Internal Revenue Service, consult your tax professional for guidance.

What it means to you.

Since many nonprofits routinely record items such as the donated use of office space, discounts on equipment and charitable discounts for services as part of their public support, this may impact their ability to meet the 33-1/3% of public support necessary to qualify as a publicly supported organization.

More importantly, the rule change could lessen participation by donors in these relationships. While most donors say that the deductibility of their donations is secondary to their desire to support a nonprofit, very few are willing to state unequivocally that deductibility is not a consideration in their business strategy. If you can't count it as a contribution, they can't count it as a donation.

In the case of large corporations that may donate excess goods such as software or electronic equipment, these donations provide a way to offset income. While the amounts may be insignificant relative to their revenues, every little bit helps. If the donor is a small business, they may not be able to absorb the cost without any offset to income.

At the very least, you should anticipate the effect on your organization resulting from this rule change. What happens if your office space suddenly becomes unavailable, or the brochures your local printing company has been doing for free suddenly have to be paid for? Can the donor just write a check back to you for the amount of the invoice as a cash donation without the transaction being suspect?

Every business in the U.S. spends a lot of time and money trying to interpret and comply with IRS regulations. Because of their tax exempt status, nonprofits are always under scrutiny by the IRS. Ignoring the impact of this rule change could be a very costly mistake. 

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