4 Common Mistakes Nonprofits Make With Donation Tax Receipts
Guest post by ThriftCart
Donation tax receipts are crucial to nonprofit operations. Not only are they essential for compliance, but they are also critical stewardship tools that build trust with donors. For the donor, it is the key they need to claim their deduction. For the nonprofit, it is a final, vital touchpoint to prove professionalism and express gratitude.
Whether you’re issuing a receipt for a gift made during a fundraising event or a cryptocurrency gift, the right process is critical to your nonprofit’s success. Unfortunately, many organizations make simple, avoidable errors on these receipts. These mistakes can damage relationships with donors or even create compliance issues that risk your nonprofit’s status.
This article will dive into the four most common donation tax receipt mistakes and how you can fix them.
Missing Required Information
The most critical mistake nonprofits can make with donation tax receipts is failing to include all of the required information. Doing so can lead to compliance issues, which may result in the loss of your nonprofit’s status if you are audited by the IRS. It also makes your receipts invalid for the donor, which makes your organization look amateurish at best and untrustworthy or fraudulent at worst.
Luckily, a quick audit of your donation receipt templates can fix this immediately. According to ThriftCart, the IRS requires nonprofit donation tax receipts to include:
Your nonprofit’s name and EIN: Your receipt must include the full, legal name of your organization and your Employer Identification Number (EIN). These are the primary pieces of information the IRS uses to verify you are a registered 501(c)(3) organization that’s qualified to receive deductible contributions.
Contribution amount or description: The receipt must clearly state the amount of a cash contribution. For in-kind gifts, it should include a detailed description of the donated goods or services, which we’ll discuss in the next section.
Date of contribution: This helps donors determine the tax year for their deductions. It should be the date the donation was received or transferred to your organization’s control.
Statement of goods and services: Generally, most nonprofits will state that their organization did not provide goods or services in exchange for the donation on the receipt. However, in some cases, your nonprofit will need to disclose a description and good-faith estimate of the value of goods or services you provided in return for a contribution (more on this later, too). If your organization is religious in nature, you may include a statement that the goods or services you provided consisted only of intangible religious benefits.
Provide receipts that include all of these elements to maintain compliance with nonprofit regulations and enable donors to safely claim tax deductions for their contributions. If your organization provides a receipt with false information, you can be subject to IRS penalties. Make sure to comply with regulations to protect both your organization and its generous donors.
Using a One-Size-Fits-All Template
Although nonprofits most frequently receive cash gifts, they may also receive other types of contributions, such as in-kind donations and grants from donor-advised funds (DAFs). Some nonprofits, usually in an attempt to be efficient or due to a lack of capacity, will try to use the same donation template for every type of gift.
However, this practice can also lead to non-compliance. Many types of gifts have different IRS reporting requirements, and lumping them together means critical details can be missed.
To prevent any issues, make sure you customize your donation tax receipts for the following types of gifts:
In-kind gifts: Chazin and Company defines in-kind donations as non-monetary gifts, such as goods and services. Donation receipts for in-kind gifts should not include a dollar value, as it is the donor's legal responsibility to value their in-kind gift, not the nonprofit's. Your job is to provide a detailed description of the gift. For instance, you might write “a large bag of assorted women’s clothing” on the receipt if the donor contributed that to your organization’s thrift store.
Stock donations: Like with in-kind gifts, your stock donation receipt should not state a dollar value. Instead, the receipt should identify the gifted security and the number of shares, such as “100 shares of Microsoft Corp. (MSFT).” The gift date should reflect the date the shares were transferred to your organization's brokerage account.
Cryptocurrency donations: Although a cryptocurrency donation is not the same as a stock donation, you should treat them identically. Your receipt must identify the type and amount of cryptocurrency and the date it was received in your organization's wallet.
Donated services or time: Many nonprofits become confused on this point, as volunteering or professional services done for free on behalf of a nonprofit are often referred to as donations. However, according to the IRS, the value of donated time or services is not tax-deductible. While you should send a thank-you message to show gratitude, you should not issue a donation tax receipt.
Quid pro quo gifts: At times, donors will receive something in return for their gift, such as a meal, a t-shirt, or event tickets. In these situations, your donation tax receipt should include a good-faith estimate of the Fair Market Value (FMV) of the items or services the donor received. The donor’s deductible amount then becomes the total of what they paid minus the FMV.
If your nonprofit frequently receives these types of donations, it’s valuable to create templates for them. For instance, a nonprofit that runs a thrift store may create a dedicated template for in-kind gifts. Then, when they receive an in-kind gift, they can use their inventory management tool to generate a receipt for the donor right then and there.
Sending Receipts Late (or Not at All)
Imagine you make a $50 gift to a nonprofit. You wait a few days, but you hear nothing back. You might feel unappreciated or even resentful. When you receive a summary of your gift the next year as you prepare to file your taxes, you might have even forgotten that you made a gift at all.
Late donation receipts create anxiety for the donor and communicate that your organization is not very appreciative of their gift. To avoid this situation, send your donation receipts within 48 hours of receiving a gift. This provides the donor with a prompt expression of gratitude and peace of mind. If a donor makes multiple gifts to your nonprofit within a calendar year, continue to follow this best practice so they know that your organization has received all of their gifts.
At the beginning of the following year, send a summary of all the gifts the donor made the year before. This summary helps the donor claim their tax deductions as they begin filing their taxes and provides another touchpoint that keeps your nonprofit top-of-mind. You’ll be building up your brand as a trustworthy partner that appreciates every contribution.
To help with this process, you may invest in software that automatically sends out receipts for every gift. Most nonprofits will use their donor management system or fundraising software to handle that for them. However, nonprofits that accept in-kind gifts or that operate stores may find that their point of sale (POS) system can also help with that responsibility.
Treating the Receipt as Only a Tax Form
A donation receipt isn’t just something you send to fulfill a compliance checkbox. It’s also a prime opportunity to say a sincere “thank you” and emphasize the impact of the gift, reinforcing and strengthening your donor relationships.
Here are a few tips for incorporating gratitude into your tax receipt:
Use warm, sincere language to express your gratitude for the gift.
Discuss how the gift will assist with your nonprofit’s mission and what it will be put toward.
Add your branding to your tax receipt so donors will feel confident that it’s from your organization.
Include a human touch, such as a signature from a board member, to show that the real people behind your organization are thankful.
Think of your receipt as a valuable marketing message. What do you want the donor to take away from it? How can you inspire a deeper connection with your mission?
A great receipt can even be a gateway to the next point of engagement. For instance, you might add a QR code to the bottom of an emailed donor receipt that links to a 60-second impact video, a blog post about a recent success story, or an invitation to follow your organization on social media.
Preventing the most common donation receipt mistakes and improving your processes is simple. Review your current receipting processes, not just the templates. Look at the systems you use, the language you include, and the timeliness of your delivery. An accurate tax receipt protects your organization, but a thoughtful and timely one builds a relationship, turning a one-time donor into a long-term, loyal supporter.