Each year, charitable organizations gather their contribution data over the past calendar year in order to prepare their donor acknowledgement letters. With the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) in late December of 2017, charitable organizations need to be aware of the changes in deductibility of meals and entertainment expenses for businesses to ensure appropriate information is included in an acknowledgement for a quid pro quo contribution.
Before TCJA, 50% of entertainment expenses for businesses were permitted to be deducted, and meals had a potential of being 100% deductible if certain criteria were met. As of January 1, 2018, businesses cannot deduct entertainment expenses and can only deduct 50% of business-related meals. How does this affect exempt organizations? If an exempt organization receives a quid pro quo payment for the attendance of an event or fundraiser from a business, the exempt organization should be disclosing the entertainment and meal expenses separately.
If an acknowledgement is provided for a qualified sponsorship payment and there is not a "substantial return benefit," the exempt organization should not value the goods/services on the acknowledgement or reduce the contribution amount in the acknowledgement. If the goods or services constitute a substantial benefit, the amount above the fair market value of the benefit would be classified as a charitable contribution. For example, if a charity hosted a golf outing, the difference between the amount paid and the value of the benefit (i.e., golf, meals, entertainment) should be disclosed as a charitable contribution. After TCJA, it is important that charitable organizations provide their sponsors information on the types and amount of financial benefit. The golf and other entertainment portion of the benefit should be separately stated from the meals.
With the passing of TCJA, tax professionals are speculating that this area of tax reform could potentially be under scrutiny. Charities always appreciate their event sponsors. As a charity, you should ensure that you provide your sponsors with the appropriate amount of information for their tax reporting requirements.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.