Allowable and deductible can mean 2 different things?  First to the donee and then to the donor.

As long as the qualified charitable entity maintains control or “use of the funds” and uses these to further their exempt purpose, the contributions are allowable for the organization and deductible by the donor.

Donors may designate a program, ministry, event, project, endowment etc., of the qualified charitable entity as long as the church controls the funding. Be careful in not designating a specific individual as the recipient, this often disallows the deduction for the donor and the church is then required to report the funds as an “agency” transaction.

So the church can solicit contributions for general, administrative and fundraising functions? Yes, as long as the church retains control or “use of the funds” and the church is operating within its exempt purpose, as designated by its IRS code.

Questions? Give me a call or post a comment.

Federal law requires the taxpayer keep a record of any deductible contributions made. For donations by text message, a copy of the telephone or wireless account bill must show the name of the donee organization, the date of the contribution, and the dollar amount. For other cash contributions, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution.

For additional information regarding Haiti donations, see this IRS release.

What are the specific requireqments for a charitable contribution? See this IRS publication for additional information.

One thing to know is if you have any professionals donate services that you would normally have to pay for you should be recording that time as an “in-kind” contribution. FASB states that if the services donated (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.

Examples to watch for are ….

Accountants, lawyers, electricians, plumbers, teachers, carpenters, doctors, even nurses. One important key to remember is that these are services that you would normally pay for or incur the cost for operations or a non-financial asset.

How do you record these services, like most donated items, you would record them at their fair market value; a.k.a. the price you would have paid had you had actually contracted the services. So how do you record the “donation” of service?

Account Name                 Debit     Credit

In-Kind Service Expense      $1,000
In-Kind Service Revenue                 $1,000

As you can see this entry hits both your expense as well as your income in equal amounts, so there isn’t a “equity or net-asset” affect.

However, if you received donated construction management services (capitalized as a component of construction costs), this is the following entry:

Account Name                      Debit     Credit

Construction in progress       $1,000
In-Kind Service Revenue                   $1,000

This type of donation affects “non-financial assets” and is capitalized/recorded on the statement of financial position – ultimately increasing net assets.

Another point…don’t forget to track these non-cash donations. If they exceed $25,000 you must report them on Schedule M of the Form 990.

Conditional promises to give are recognized only when the conditions are satisfied. Therefore, no revenue or receivable should be recognized at the time the promise is received. If any assets are received prior to the conditions being met, the assets should be accounted for as a refundable advance (liability). Once the condition is met, the liability is removed and revenue is recognized.

Additional disclosures must be made regarding promises to give. When disclosing conditional promises to give, you should disclose the following:

1. the total of the amounts promised; and
2. a description and amount for each group of promises having similar characteristics, such as promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date.

Summary of Unconditional vs. Conditional Promises to Give

 The following are examples of promises to give:

 Unconditional or Conditional?

Conditional Disclosure 1:

A trustee has agreed to match contributions to the Entity’s endowment funds on a one-for-two basis until the total reaches $5,000,000. In addition, a contributor has pledged to contribute $250,000, conditional upon proper matching with a grant.

Conditional Disclosure 2:

During 20X7, the Entity received restricted grants totaling $50,000 that contained donor conditions (primarily matching funds requirements). Since these grants represent conditional promises to give, they are not recorded as contribution revenue until donor conditions are met. Funds received from the donor in advance of the conditions being met totaled $20,000; are recorded as refundable advances; and will subsequently be recognized as contribution revenue when donor conditions are met.

For more information see “Unconditional Promises to Give” for general information regarding promises to give.

Promises to give can be unconditional or conditional. Unconditional promises to give are exactly that: unconditional (no strings attached). Once received, they can be used toward the ongoing operations or mission of the not-for-profit organization. 

The timing of recognition of contribution revenue or receivable depends upon the promise to give being unconditional or conditional. Unconditional promises to give are recognized when received, even if the donor restricts the promised contribution for use in a future period and even if the promise will not be paid until a future period. If the promise to give is restricted for use in a future period or won’t be paid until a future period, it should be reported as restricted support, either temporary or permanent. 

Contributions received should be measured at their fair values.  If the promise is expected to be collected in less than a year, it is measured at net realizable value, which in most cases would be the face value net of any estimated uncollectible amount. If the promise is expected to be collected after one year, the fair value should be based on future cash receipts, discounted at a rate “commensurate with the risks involved.”  Basically, the discount rate should be based on the same criteria that would be used for trade receivables.  The entity should consider the following factors:

1. when the receivable is expected to be collected;
2. the creditworthiness of the other parties;
3. the entity’s past collection experience;
4. the entity’s policies concerning the enforcement of promises to give;
5. expectations about possible variations in the amount or timing of the cash flows; and
6. other factors concerning the receivable’s collectibility.

Additional disclosures must be made regarding promises to give. When disclosing unconditional promises to give, you should disclose the following:

1. the amount of promises receivable in less than one year, in one to five years, and in more than five years; and
2. the amount of the allowance for uncollectible promises receivable.

 Examples

 Unconditional Disclosure 1:

Unconditional promises to give are recorded as receivables and revenue when received. The Entity distinguishes between contributions received for each net asset category in accordance with donor-imposed restrictions. Pledges are recorded after being discounted to the anticipated net present value of the future cash flows.

              Pledges are expected to be realized in the following periods:

                                                                                                  20X1                20X0     

                    In one year or less                                                 $  1,438,547     $   1,313,217
                    Between one year and five years                                 1,970,255          1,780,764
                                                                                                 3,408,802          3,093,981
                    Less:
                        Allowance for uncollectible pledges                            (969,036)          (717,538)
                        Discount, at 6%                                                     (387,800)          (324,867)
                                                                                             $  2,051,966     $   2,051,576

Unconditional Disclosure 2:

The pledges receivable consist of operating and capital project fund-raising campaigns. At June 30, 20X1, all pledges receivable are expected to be collected during the next year. Management has determined that the pledges receivable are fully collectible; therefore, no allowance for uncollectible accounts are considered necessary at June 30, 20X1.

For more information about conditional promises to give, watch for my next post.

1. Unconditional promises to give are statements by a donor of their intent to make a contribution of some kind at a future period. (For example, the ABC Foundation informs you that they have voted at their last Board meeting to give your organization $10,000 in January.)
2. Conditional promises to give are pledges by a donor that are “conditioned” upon some other event (other than the passage of time) occurring. (Some examples are: 1). A donor states that he will give you $5,000 for your capital campaign if a contract with a builder has been signed. 2). A foundation will contribute $100,000 if a new program is implemented. 3). A corporation will donate $1,000 if other corporations in your community do the same.)

Remember: Conditional pledges require some other action to occur.

So what is the different accounting treatment?

1. Unconditional pledges are recorded as revenue (which is temporarily restricted – see blog on this topic) when the not-for-profit organization receives the pledge (written or verbal).
2. Conditional pledges are recorded as revenue when the condition has been met. Until that time, the conditional pledge would be disclosed in the notes to the financial statements (if significant), but not reflected in the accounting records. [For example, you learn on December 1, 2008 that a donor is going to contribute $1 million for your organization to begin an endowment if you are able to establish a location in another town by December 1, 2009. In the financial statements ending December 31, 2008, this information would be disclosed in the footnotes. On March 31, 2009 the location is opened, and at that time you would recognize the pledge and the associated revenue of $1 million even if payment has not actually occurred.]

Pledge information can be conveyed to you verbally or in writing. However, we suggest that all significant pledges be obtained from the donor in writing stipulating any restrictions, date payment is to be expected, any conditional information, etc. This practice helps to reduce any confusion or errors.

If the donor does not send this written information, then we suggest that you write the donor an acknowledgement of their pledge and outline the verbal specifications. Ask the donor to sign a copy of the letter and return it to you.

Sometimes it can be unclear when the condition of the pledge has been met and should be recorded in your accounting records. If you have questions regarding this recognition, give us a call.

Short Answer:  A private foundation (PF) or a donor advised fund (DAF).

Question:  Which one should I choose?

Deeper Answer:  It depends. 

Both a PF and a DAF meet the primary objective of generating a charitable deduction in the year of transfer, even though no funds may actually reach a charitable organization that puts those funds to use in their particular charitable endeavor. There is one primary reason that a PF may make sense for a donor – control. The donor of a PF will determine the initial members of the foundation’s board, and usually serves on the board. The board controls the ultimate distribution of funds to outside charities and controls the selection of all investments made by the PF. With a DAF, the donor can recommend charities to receive disbursements of funds, but the final decision rests with the management of the DAF. Also, depending on the DAF, available investment choices may not allow for investments that meet the donor’s wishes.

For assistance in determining your best alternative, contact us.

What is a raffle? According to www.dictionary.com, a raffle is a form of lottery in which a number of persons buy one or more chances to win a prize.

According to Texas state statutes, Chapter 2002 of the Occupations Code sets the rules for charitable raffles. Some of the notable provisions of the law include:

• No more than two raffles can be conducted per year.
• The two raffles cannot be conducted simultaneously.
• Organization must set a specific date to award the prize.
• Mass communication (via newspaper, radio or television) is not allowed.
• Individuals may not be compensated for conducting/promoting the raffle.
• The tickets must be sold by the organization and its representatives.
• The prize cannot be cash.
• The organization must have possession of the prize in your possession at the time of ticket offering.
• A $50,000 maximum prize value.

Due to these requirements, Organizations must act wisely when scheduling these events. The tickets must also have the following specific information on their face:

• Name and address of the organization
• Ticket price
• Description of prize(s)
• Date the prize will be awarded

How does gaming affect the redesigned Form 990? If you collect more than $15,000 from the gaming event, the information must be disclosed in Schedule G. Need help in determine what is a “game”? Call me.

• Is there a game of chance?
• Does the game involve cards, dice, or other gambling devices?
• Are the chances of winning equal for all players excluding the effects of skill?

There are certain common events that have been ruled against or could possibly constitute illegal gambling. These include:

• An entry fee to participate in a game of chance.
• A rubber duck race requiring an entry fee.
• A poker run where individuals pay for cards to see who gets the best hand to win a prize.
• Many more possible….

If your organization is still considering certain gaming activities, there are steps you can take to make the event fun and legal. Consider these options:

• No fee to enter or play, with the exception of a food charge (then we recommend you solicit a contribution for the food.)
• Each participant that comes must be in consideration for the prize offered.
• Charge an entry fee but award no prizes for winning or the prizes could be offered as door prizes with everyone having the possibility of winning (This will generally not substitute for casino nights, but may work with other games.) 

For annual gaming revenue that exceed $15,000 the new redesigned Form 990 requires additional disclosure of the event. Remember, this tax form is public record and assessable by state and local taxing authorities.

Illegal gaming for the participant is a Class C Misdemeanor. The host may be charged with a Class A Misdemeanor and face higher fines and possibility of jail time.

For more information on gaming and ramifications see Chapter 47 of the Texas Penal Code.