Your business can accept gifts of cash or tangible property, such as equipment or land.
A small legal technicality might be helpful here to avoid confusion about what is meant by the term gift. Gifts are, legally, the transfer of cash or property between individuals or from one individual to an organization with no expectation of anything in return. Donations, on the other hand, refer to the transfer of money or things to a qualified charitable organization. Donations could be the same tangible object as a gift–cash, equipment, land, or other property–but a donation is tax deductible for the person making that donation. The value of gifts is not tax deductible. In fact, if the value of the gift is high, the person making the gift could actually incur a tax obligation.
There may be little practical distinction between gifts and donations as almost 90% of taxpayers who give money claim the standard deduction rather than rely on a compilation of their charitable donations for the year in order to get a tax break. Furthermore, the gift tax will not impact modest gifts because the value of the gift must soar above $15,000 before the person making the gift needs to be concerned about having to contend with the gift tax. However, there will be people who are interested in gifting businesses money but who are only interested in making tax-deductible contributions. And, there will be others who want to gift things of such high value that the gift tax will come into play.
The business’ responsibility as far as these tax issues go is just clear communication. Organizations that are considered qualified charitable organizations must register with a state agency before they solicit the public for donations. Nonprofit organizations go through an extensive application process with the IRS before being able to operate. In short, businesses that accept gifts must make it clear that they are not nonprofit organizations and that no gift will provide supporters any tax-deductible benefit.
Communications with gift-givers should also clearly establish that the gift is not in exchange for anything at all. This is to protect the business from having to pay income tax on the gift’s value for that year. To firmly document the gift as such, a letter explaining that the money is a gift is all that is needed. Both parties should keep a copy of the letter explaining the nature of the value transferred in case it is needed for tax purposes.
The gift giver is at risk of a much higher tax bill depending on the value of the gift. As stated above, the value has to be above $15,000 to qualify for the gift tax (the exact amount changes annually; check the IRS website for up-to-date rates). If the gift does exceed the threshold, the giver is required to file a gift tax return stating the amount they gave. That year, they could face a large tax bill, up to 40% of the value. Furthermore, any amount given over the annual threshold is applied to a lifetime giving limit, which changes annually as well.