The tax code recognizes the valuable work that charitable organizations, such as scholarship funds, do by allowing donors to deduct the value of their contributions. In addition to incentivizing contributions, the tax code also grants exemptions from income tax to the charitable organization, a huge benefit to scholarship funds that rely on investment income to sustain yearly scholarships.
Tax Exempt Status
Donors can only deduct contributions made to tax-exempt scholarship funds. Donors are responsible for ensuring that the scholarship fund has applied and received tax-exempt status from the Internal Revenue Service before deducting contributions. New scholarship funds can act as tax-exempt organizations by soliciting donations and filing the applicable tax returns while waiting for the IRS to decide on their application. Donors can also deduct contributions made during that time. However, if the IRS denies the application, those deductions will be disallowed.
The IRS only allows deductions for cash donations when the donation can be confirmed with adequate documentation, such as a receipt or cancelled check. Single contributions over $250 must be supported by a written acknowledgement from the receiving organization, specifying what, if anything, you received in return. Similarly, you need written acknowledgement, such as a receipt or letter, for any donations of property. Depending on the value of the contribution, the records may need only the name of the organization, the date and place of the donation, and a description of the property donated. However, you may be requested to document additional information on when and how you acquired it, your adjusted basis in the property and a signed report from a qualified appraiser.
Cash Donation Timing and Limits
Cash donations are the easiest to account for and have the highest contribution limit. You can deduct most cash donations the year you make the contribution. However, for single contributions greater than $250, you must receive acknowledgement before your tax filing date to claim it in the same year. If acknowledgement arrives after your filing deadline, you claim the deduction on the next year’s taxes. Your deduction cannot exceed 50 percent of your adjusted gross income for the year; however you can carry the deduction forward through the next five years.
Non-cash Donation Timing and Limits
Typically, non-cash donations, such as donating your car to the scholarship fund, cannot exceed 30 percent of your adjusted gross income for the year. Like excess cash donations, excess property donations can carry forward up to five years before expiring. You can elect to claim donated property at cost, rather than fair value, to increase the annual limit to 50 percent of your adjusted gross income. You can claim the donation for the year in which the transfer of property occurred or became virtually certain to occur.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.