For Nonprofits, Quid Pro Quo Isn’t a Simple Exchange
June 22, 2022

Quid pro quo donations occur when a nonprofit receives a payment that includes a contribution and the organization provides the donor with goods or services valued at less than the contributor’s payment. Among other things, these arrangements create reporting obligations for your nonprofit. And if you don’t meet these obligations, the IRS could assess financial penalties.

Give Written Notice

Quid pro quo rules apply if your nonprofit receives a donation of more than $75 and you provide a benefit to the donor. In such cases, give written notice to donors that they can deduct only the amount in excess of the value of the goods or services they receive in return. Also 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 a 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.”

Put a Price on 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 at a hotel with live music where the hotel 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 hotels for a dinner with entertainment. Or you could ask the hotel and 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.

Note Exceptions

You don’t need to provide a donor with written notice if a donation qualifies as a “token exception” — for example, you give the donor an inexpensive item such as a coffee mug with your charity’s name on it. Exceptions also exist when certain membership benefits and religious benefits are exchanged. If you’re unsure about whether donations are considered quid pro quo, contact us.

© 2022

You might also like

Putting Accountability into Practice

Putting Accountability into Practice

At its base, “accountability” means taking responsibility for outcomes — both good and bad. But one common byproduct of accountability is that results are actually more likely to be positive than negative. That’s because accountable managers work proactively, seeking...

read more
The Audit Is Over. Now What?

The Audit Is Over. Now What?

Whew! That’s probably your reaction when outside experts announce that their audit of your nonprofit is complete. But even if auditors have left your premises and returned the documents they’ve reviewed, the work isn’t really over. Not only do your executive director...

read more
The FLSA Asks Your Nonprofit to Accurately Classify Staffers

The FLSA Asks Your Nonprofit to Accurately Classify Staffers

Are your nonprofit’s staffers employees or independent contractors? It’s an important question because under the Fair Labor Standards Act (FLSA), misclassifying workers can lead to penalties and other costs. If you haven’t reviewed your staffers’ status since the...

read more