What is a Donation Tax Receipt and Why is it Important?

This article was provided by ThriftCart.

Thorough nonprofit governance covers everything from program activities to budgeting to donor management, including the issuance of official donation tax receipts. If you’re just starting your nonprofit, you might not yet understand what exactly a donation tax receipt is and why they are essential to your organization’s success. It’s easy to see these receipts as just another administrative hurdle or another type of busywork, but they are critical to building donor trust and ensuring regulatory compliance.

This guide will answer all your burning questions about donation tax receipts and discuss common mistakes to avoid.

A donation tax receipt, referred to by the IRS as a “written acknowledgement,” is a document that substantiates a charitable contribution. It’s provided to donors by 501(c)(3) organizations to prove that the donor made a gift, enabling them to claim tax deductions for their contributions.

While the IRS requires donation tax receipts for any single contribution of $250 or more, it’s a best practice to issue receipts for all donations, regardless of size. Establishing this standard simplifies record-keeping for your donors and your nonprofit, and keeps your mission top of mind for your loyal supporters.

Donation tax receipts may seem like just another compliance task to check off. However, viewing them solely through this lens is a mistake. These receipts are essential for a few different reasons:

• Safeguarding your nonprofit status: As the IRS requires donation tax receipts for gifts above $250, it’s important to deliver accurate and timely receipts to ensure that you stay in compliance with their regulations and maintain your 501(c)(3) status. Maintaining rigorous receipting processes demonstrates that your nonprofit takes its governance and financial controls seriously.
• Enabling tax deductions for donors: For some or all of your donors, part of the draw of giving to your mission is that their gift is tax-deductible, enabling them to pay fewer taxes for that calendar year. Issuing a receipt proves that they actually made the gift, which is essential in the event of a tax return audit. Without a receipt, the donor could lose their deduction and face penalties, which will make them less likely to give to your mission in the future.
• Building long-term trust: If an individual gives to your nonprofit but doesn’t receive any acknowledgment or receipt, they might feel wary about making another gift in the future. Additionally, if you send inaccurate or late receipts, your organization may look disorganized or untrustworthy. Prompt and accurate donation tax receipts demonstrate that your organization is worthy of the funds it receives and reinforce the donor’s decision to support your mission.

Maintaining a log of donation receipts is also a pillar of internal data hygiene and accurate bookkeeping. You’ll always be able to find the source of any donated funds, and you can submit important filings, like Form 990, with confidence knowing that all your financial data is accurate.

While the IRS does not have a specific form template for donation tax receipts, it does require specific content to be included. ThriftCart lists the following details you must include on your receipts:

• Your nonprofit’s name and employer identification number (EIN)
• Amount of cash contribution or a description of a non-cash contribution
• A statement covering one of the following:
  • That your organization didn’t provide any goods or services in return for the gift
  • That describes and outlines a good-faith estimate of the value of goods or services that your organization provided in return for the gift
  • That says any goods or services that your organization provided in return for the gift consisted only of intangible religious benefits

To make issuing these receipts easier, many nonprofits invest in nonprofit software that can automate the process, from filling out receipts to sending them to donors. That way, staff members don’t have to go through the busywork of handling everything manually, and you’ll reduce human error.

Certain types of nonprofits may also purchase software solutions that issue donation receipt types that align more closely with their mission. For instance, a nonprofit that operates a thrift store might choose a point of sale (POS) system that focuses on automating receipts for in-kind gifts, rather than cash donations.

When handling your donation tax receipts, here are a few common mistakes that you should watch out for:

• Receipting the wrong person: Always issue the receipt to the name on the check or credit card. If a spouse or assistant hands you the gift, double-check who the legal donor is before printing out or sending the receipt.
• Forgetting the “no goods or services” statement: This is the most common reason receipts are rejected in an audit. Ensure each of your donation templates includes the corresponding phrase.
• Assigning value to in-kind gifts: This is particularly important for nonprofits that frequently accept in-kind donations, such as those running thrift or secondhand stores. While you should include a description of the non-cash gift on the receipt, it is not your duty to estimate the value of the gift. Leave a blank space on the receipt for the donor to fill out that information.
• Waiting until year-end: Some nonprofits make the mistake of sending only a summary receipt at year-end detailing all the gifts a donor has made that year. However, sending receipts within 48 hours after a gift is better for donor relations. You can still send a summary receipt in January for the year before to make it easier for donors to file their taxes.

Additionally, don’t overlook your donation receipts as a stewardship opportunity. For an easy stewardship win, eCardWidget recommends including a thank-you letter alongside your tax receipts to show your gratitude. This letter doesn’t have to be particularly elaborate. Still, it’s always nice to include a thank-you, specify how you’ll use the donor’s gift, and offer opportunities for them to continue engaging with your work. Since your donor will be expecting a donation tax receipt, this is an organic opportunity to keep them invested in your mission.

Donation tax receipts are more than just paperwork, they’re a fundamental part of the donor stewardship cycle. Whether you’re starting a new nonprofit or optimizing your organization’s existing workflows, ensuring your receipts are accurate, compliant, and timely protects your donors and reinforces the professional integrity of your nonprofit.