The How, When, and Why of Donation Receipts
The donation receipt is perhaps one of the more overlooked documents in the nonprofit realm, despite being one of the most important. The donation receipt has a lot of purposes, from tax deductions to record-keeping. Not to mention the fact that it is simply an important customer (and in this case, "donor") service practice that indicates goodwill on the part of the organization.
Not all donation receipts are created equal and learning what makes a good one is part of maximizing your nonprofit's effectiveness and reliability. Whether you are hosting a fun-run or responding to donation letters that were filled out by supporters, a donation receipt is the only way to make sure everyone’s records are the same and that donors can get their well-deserved tax benefits.
In this article, we will cover:
- What Is a Donation Receipt?
- Why Are Donation Receipts Important?
- Types of Donation Receipts
- What to Include in Your Donation Receipt
- Legal Obligations
- Final Thoughts
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What Is a Donation Receipt?
A donation receipt should be issued for any monetary or in-kind donation made to your organization. Regardless of amount or type, a 510(c)3 organization must record every donation in order to keep its books compliant.
Donation receipts usually come in the form of an email or letter. The format of your donation receipt will depend on the type of the donation; for example, whether it was made in person or online. Sometimes organizations will send out a physical copy of a donation receipt that has already been sent via email.
Pro Tip: If you are using a CRM to record your donations, be sure to ask your provider if there is a feature that allows you to set up the automated sending of donation receipts. This will save your staff a lot of time and effort, and it will also ensure all relevant information reaches your supporters.
Why Are Donation Receipts Important?
Donation receipts serve many purposes, none of which can be overlooked. The first part of writing more effective donation receipts is understanding why your organization needs them, and how your donors will use them.
Donors Use Donation Receipts for Tax Deductions
The first and probably most well-known reason for issuing donation receipts is that donations are, by U.S. tax law, tax-deductible. As a quick recap, the amount of an individual's total donations over the course of the fiscal year can be subtracted from their taxable income.
For example, if Mrs. Johnson makes $150,000 of taxable income per year, and donates $1,000 to your charitable organization, the amount she must pay taxes on is reduced by the same amount. Instead of paying taxes on $150,000, she will only pay taxes on $149,000.
Oliver is ready to learn all about donation receipts!
While tax deductions are not the primary reason your amazing donors give to your cause, you should facilitate accurate and complete records for them in order to give back as much as possible and maximize their tax benefits.
Donation receipts allow your donors to easily file and calculate their donations for the year, giving them the power to reduce their taxes. But donation receipts serve another purpose in this context: audits.
If a donor gets audited, they must prove to an IRS auditor that they actually donated the amount they said they did on their taxes, with no exceptions. Donation receipts, essentially written acknowledgments of the transaction that took place, make this possible.
Pro Tip: When an individual budgets, they have to track both their income and expenses. Donating to your cause, just like buying food or renting an apartment, is an expense. Having a complete record of donation receipts makes it easier for your donor to fit supporting your cause into their financial outlay. This is particularly important for donors who offer your organization a recurring donation; because it is a monthly, quarterly, or yearly expense, it must be tracked and accounted for on an ongoing basis.
Donation Receipts May Be Required by the IRS
Depending on the type and amount, the IRS requires that receipts be given for certain donations. The typical threshold is $250, whether paid by cash, card, check, or given in-kind.
Remember, your organization should never place a value on an in-kind donation. That responsibility (and liability) falls on the donor.
Because nonprofits have a 501(c)3 or other 501 tax-exempt status, and because that status is contingent upon compliance with regulations such as donation receipts, it is imperative that you research the laws and even speak with a tax representative to make sure you are doing everything right.
Organizational Bookkeeping Is Easier and More Accurate with Donation Receipts
Donation receipts do not just help your donors track finances, they also help your organization stay on top of bookkeeping.
One of the best ways to keep bookkeeping easy is to have a CRM or nonprofit management software on tap to automatically handle donation receipts. They typically work like this:
The donor makes the donation to your organization through their preferred payment method
The payment method is integrated with the nonprofit management software, which then kicks into action
The software issues a donation receipt to the donor, while simultaneously creating an entry in its built-in accounting software or an integrated bookkeeping software like QuickBooks.
This act of "sending two birds on vacation with one ticket" is a great way to both increase the overall accuracy of your books while reducing your bookkeeping workload.
Types of Donation Receipts
While all donation receipts achieve roughly the same goal, there are several different types we will cover.
Charitable Donation Receipt
Charitable donation receipts could also be called "general" donation receipts. They, for instance, respond to donation letters, like these lapsed donor letter examples and holiday appeal letters, fundraising samples, as well as this general fundraising appeal letter. There are a variety of ways you may format charitable donation receipts, but they all must include the information listed later in this article.
In-Kind Donation Receipts
An in-kind donation is one that does not consist of money, but rather of goods or services. Most common with corporate sponsorship, or after an in-kind donation letter, an in-kind donation can include anything that is given free of charge that can be used by the organization or sold in a charity event.
Mary is having a good think on all the different types of donation receipts.
For example, if your organization’s cause is promoting health and wellness in less fortunate neighborhoods, an in-kind donation may be something like a truckload of athletic gear from a sporting goods store, or vouchers for a health food chain.
An in-kind donation receipt should include all of the information on a standard charitable donation receipt, with the important exception of the value of the donation.
Leaving off the value of an in-kind donation on a receipt is okay because a truckload of shoes has no monetary effect on your bottom line; it will not show up on cash or accrual accounting documents.
More importantly, however, it is actually against the law for a nonprofit organization to place a value on an in-kind donation. Instead, it is up to the donor to have the value assessed by a third party for tax purposes.
Instead of the value, simply list the type, quantity, and condition of the goods donated on the in-kind donation receipt.
Cash Donation Receipt
A cash donation is any charitable gift to your organization that comes in the form of physical bills and coins. It is important to pay special attention to cash donation receipts because, unlike an electronic transfer or check, there is no inherent record of the donation. That is because a cash donation is simply cash changing hands, there is no automatic way to track it; you must create one.
This is different from an electronic transfer or check donation. An electronic transfer can be tracked because usually, the payment method will automatically create an entry for the transaction somewhere, like a bank statement or transaction history. A check is a document in and of itself that can, in a pinch, be recovered from a file for proof of payment.
Cash, however, has no such convenience, and therefore must be acknowledged in writing. A cash donation receipt should include all of the information of a standard donation receipt, with the addition of a written and signed statement that your organization received the cash.
Stock Gift Donation Receipt
A stock gift occurs when an individual donates appreciated securities to a nonprofit. There is a huge tax benefit associated with stock gifts. Here is why, as explained by two scenarios.
1. Selling stocks in order to get cash to donate to a nonprofit
The federal tax rate for capital gains is 20%. If an individual sells stock in order to gift your organization the cash, they will pay a 20% tax on the gains of the stock, and then deduct the cash amount they donate.
Let’s say an individual sells $11,000 worth of stock with a total capital gain of $1,000. They then pay the 20% capital gains tax and gift all the cash to your organization. Their total deduction would be $10,800.
2. Gifting stocks to a nonprofit
If an individual gifts the stocks to your organization, they never technically realized the gains of the stock, and therefore would not owe capital gains tax. They would then be able to donate the full amount of the stock to your organization, without having to subtract 20% first, and deduct the total from their taxes.
The same individual, in our example, would be able to deduct $11,000 from their taxable income, and your organization would be able to sell the stock and keep all $11,000, rather than just $10,800 in cash.
Best of all, because of your tax-exempt status, you do not need to pay any taxes when you sell the stock.
Your donation receipt, in either case, should declare the gift of stock, including its ticker, number of shares, and the date of the donation. It should not list the value of the stock since your organization, as mentioned, cannot legally assign value to securities or gifts in-kind.
Silent Auction Receipt
A silent auction is a charity event in which donors bid on certain items by writing their bids down on a sheet of paper. The winner pays the amount they wrote down and takes home the item.
A receipt for a silent auction is a little different than the other forms of donation receipts mentioned above, because the donor is technically paying for an item that has some nominal value.
On a silent auction receipt, the amount paid to the organization should be listed as normal. However, below that entry, you should also list the fair market value of the item they purchased. Typically, a donor can only deduct the overage they paid on the FMV of the lot.
For example, if a donor bids $1,000 on an item with a fair market value of $500, the donor is allowed to deduct the $500 overage from their taxable income. The fair market value of the item is typically assigned by the donor of said item.
End-Of-Year Donation Receipt
An end-of-year donation receipt is not given for a specific donation. Rather, it is a sort of summary of the total contribution made by the donor over the course of the fiscal year. An end-of-year donation receipt is often confused with a donation receipt for a fulfilled end-of-year donation letter.
Note that while you should still issue receipts for individual donations, it is also good practice, and sometimes required, to send an end-of-year donation receipt that encapsulates the total amount donated by a given donor.
Peter is feeling good about his newfound donation receipt knowledge.
Doing so makes their life a lot easier when it comes to reporting deductions, and it also gives you a chance to sniff out any problems or donations you may have missed over the last 12 months.
Pro Tip: Creating templates for your receipts will save you time and ensure that your receipts never fail to provide crucial information. If you frequently receive different types of donations, saving templates of each corresponding receipt can mitigate confusion and error.
What to Include in Your Donation Receipt
There are a few things to include on your donation receipt to make sure that it is an official receipt, rather than just an acknowledgment. These include:
The donor’s full name
The organization’s full name
A statement of your organization’s 501(c)3 status
A donation ID, or a unique number for quick look-up and reference purposes.
The nature of the donation
The date of the donation
A statement that no goods or services were exchanged for the donation (if true), or otherwise a statement of fair market value of the good or service provided.
The amount of the donation
The name and signature of an authority, usually the organization’s treasurer
If the donation receipt is being issued because of a fulfilled donation request, it may be a good idea to list the request number as well.
While this is not a legal requirement, it is a good idea to include a thank you letter for donations at the bottom of, or in conjunction with, your donation receipt.
As mentioned, writing a donation receipt is often a legal requirement. Here are some of the details of IRS publications and regulations when it comes to 501(c)3 donation rules.
Any donation over $250 is required to be reciprocated with a receipt
Failure to issue a receipt can result in penalties of $10 per contribution, up to $5,000 for a specific campaign
In-kind donation receipts must contain a description, but not a value, of a non-cash contribution
All donation receipts must contain a statement that no good or service was issued in exchange for the donation.
If a good or service was exchanged for the donation (such as in a silent auction), a description of the good, as well as the assigned fair market value, must be attached.
Donation receipts are extremely important in the nonprofit world. If you skimp on them, you risk more than your reputation - you might be risking your donors’ tax benefits or even your 501 tax status as an organization.
A donation receipt can come in many different formats: as an email, postcard, or automated notification in your supporter’s donor portal, among others. What format a donation receipt comes in depends on the type of donation it records. Every donation receipt should at least include the donor’s name, the name of your organization, the nature and amount of the donation, dates, and signatures of the president or treasurer of your organization.
Failure to issue receipts on donations of over $250 can result in fines, so the best practice is to set up an automated nonprofit management software (like Springly!) to ensure you are hitting the right points every time.
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💡How do I write a receipt for a donation?
A donation receipt usually consists of a few common elements, including the date and amount of the donation, the donor’s name, your organization’s name, the nature of the donation, and more. Find out more.
🔑 What is a donation tax receipt?
A donation tax receipt is proof of donation for a donor, so that they can write the amount of the donation off on their taxes. Find out more.
📝 Will IRS ask for donation receipts?
Donation receipts are required by the IRS for any donation over $250. Donation receipts are also required if a donor is audited by the IRS. Find out more.