A quid pro quo contribution occurs when a nonprofit receives a payment that includes a contribution and the nonprofit provides the donor with goods or services valued for less than the total payment. When this occurs, the donor can only deduct the amount in excess of the value of the goods or services.
Meeting Obligations
Quid pro quo arrangements create an obligation for nonprofits. If the nonprofit receives more than $75 and they in turn provide a benefit to the donor, the nonprofit must advise the donor that it’s a quid pro quo contribution. In such cases, donors must be provided written notice that they can deduct only the amount in excess of the value of the goods or services they receive in return. Also. the nonprofit must provide donors with a good faith estimate of the value of the goods or services provided in return.
This 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.”
Valuing Goods and Services
Before you can inform donors of the value of goods or services, you must put a price on them. Let’s say your nonprofit hosts a dinner for top donors at a high-end restaurant and pays for their meals. The donors then make large gifts. Here, determining value is fairly simple. 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 tax-deductible for the donor.
But what if your charity sponsors a gala dinner with live music where the banquet facility discounts the food and the band performs gratis — both as contributions to your organization? To establish the value to be reported to donors, 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 dinner with entertainment. Or you could ask the banquet facility and the band to tell you what they normally charge customers that aren’t charities.
For donated auction items, ask what a willing buyer would pay for them in an “arm’s length” transaction — that is, in the marketplace. Report each item’s value on the item bid cards.
Risking Penalties
There are some exceptions to these quid pro quo rules. But in most cases, nonprofits risk financial penalties if they fail to furnish proper acknowledgment and disclosure to donors. Contact a member of Olsen Thielen’s Not-for-Profit team if you have questions or need clarification.