Many not-for-profit organizations, including churches and other religious organizations, already sponsor scrip programs. A recent IRS ruling adds a potential new benefit to this fundraising tool. Scrip is substitute money. It is usually in the form of cards or certificates that can be used as cash at various merchants. Not-for-profits are able to buy the scrip at a discount and then sell it at face value, retaining the difference. Previously, none of the money the individual spent buying scrip from an organization could be considered a charitable contribution because the individual received scrip with a value equivalent to the amount paid.
According to a Private Letter Ruling issued by the IRS on November 6, 2009, the difference between the discounted amount and the face value may now be considered a charitable donation if the program is designed correctly. Private Letter Rulings cannot be used as precedent, but they do provide an idea of the IRS’s position on an issue. According to the IRS, if the organization gives the purchaser the option to receive a portion of the organization’s profit on the scrip as a cash rebate at the time of purchase, then the amount of the rebate can be treated as a charitable contribution if the purchaser elects to not take the rebate. Under this model, the purchaser has the choice to (1) pay the full face value and get a cash rebate, eliminating some or most of the profit for the organization, or (2) pay the full face value and let the organization keep the difference. If the purchaser decides to pay the full face value and let the organization keep the difference, the profit that the organization keeps can be considered a charitable contribution by the purchaser. For example, if an organization buys a $100 gift card to a store for $95, the purchaser may either pay $100 and get a $5 rebate or pay $100 and let the organization keep the $5. If the purchaser elects the second option, they have made a $5 charitable contribution.
There are several factors to consider before making a scrip program eligible for charitable contribution treatment as described above. First, there is the risk that purchasers will take the cash rebate and diminish the organization’s profits. One way to minimize this is to charge an administrative fee on all sales of scrip that would cover the administrative costs of running the program. In the above example, purchasers would have the option of a $4 cash rebate or donation and the organization would keep $1 of the profit to cover its costs. Second, this program does necessitate enhanced record keeping. Proper records of the amount of charitable contributions each person makes must be maintained, the same as for other charitable contributions. On the other hand, another benefit of this type of program is the elimination of the risk that the IRS might consider the income from the sale of scrip to be unrelated business income. Finally, it is important to consider the potential loss of purchases to other organizations that elect to give supporters the charitable contribution if your organization does not offer this benefit. Overall, however, this change could lead to significantly greater scrip earnings for all not-for-profits by giving individuals an increased incentive to purchase scrip.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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