Not-for-profits may think they’re doing employees, volunteers, or program recipients a favor when they give them gift cards, but think again. There are often tax consequences that come into play for both the organization and the recipient. At issue is the cash value of the gift card, and cash does not fall under the IRS’s definition of de minimis fringe benefits. Whether not-for-profit (NFP) organizations are simply planning for the upcoming holiday season later this year or looking at how to recognize and reward staff and volunteer efforts, it pays to understand how gift cards are valued and reported.
De Minimis Fringe Benefits
The IRS considers de minimis fringe benefits small in value and provided so infrequently that accounting for it would be unreasonable or impractical. Frequency and value are the two hallmarks of de minimis fringe benefits; the IRS also states that these types of benefits “must not be a form of disguised compensation.”
Examples of de minimis fringe benefits that NFPs can give without any tax consequences include:
- Occasional snacks, coffee, or doughnuts
- Occasional tickets to events
- Holiday gifts, like a gift basket
- Flowers, fruit, books, etc. under special circumstances
- Discounts to goods and services
- Free parking or transportation benefits
Since gift cards, even for a specific purpose such as to a restaurant or grocery store, are treated as cash, when given to an employee or volunteer, must be recorded as wages. Wages mean that appropriate taxes must be taken out and the entire amount reported on the individual’s W-2. Further, if the organization reaches a cumulative value of cash and cash equivalent gifts and wages with a single individual, then the NFP is required to file a Form 1099 and send a copy to the recipient.
There are differences between gifting employees and volunteers gift cards, too. An employee already has FICA and Social Security taxes withheld and receives a regular paycheck. Volunteers donate their time but may perform similar duties as some employees; regularly donating gift cards to volunteers could trigger an event with the Department of Labor and potentially cause the volunteer to be reclassified as an employee – wages, taxes, and all. In any case, volunteers would be required to report the amount of any gift card on their own income.
What About Gift Cards to Persons In Need?
There is still a lingering question about how to treat gift cards when given to NFP’s program recipient (e.g. those in need). If the recipient is a family or individual in need and not a volunteer or employee, does the gift card still count as taxable income?
The biggest consideration in this case is purpose. NFP funds should be spent on activities aligned with its purpose, and if it’s difficult to guarantee that a gift card would meet that purpose, it’s probably best to avoid. It’s also important not to single out any one individual or family, since NFPs are designed to serve a group of people, not an individual. This may also violate privacy laws. It may be that one NFP organization is better situated to serve individuals or families in need; in that case, channel the respective donations toward that purpose.
If an NFP does want to pass along gift cards to program recipients, there are many precautions that need to be considered. Gift cards are a common source of fraud within nonprofits. If your organization wants to consider a gift card drive, or to purchase gift cards, there should be stringent controls, segregation of duties, and detailed inventory, purchase, and distribution lists. The type of gift card needs to be considered as well. How can you ensure a cash equivalent gift card i.e. VISA gift card will be used for mission purposes? Are there fees associated with the card? Will you require the recipient to return a receipt? With all of these considerations, gift card programs may but more of a burden on the organization’s staff, as well as the recipient, than what the gift card is worth. However, many organizations have effectively and efficiently utilized gift card programs for their program recipients.
When donors give an organization gift cards for the purpose of redistributing them, ensure all other applicable fundraising rules are followed; this includes providing the donor with a record of the tax-deductible gift. And, as with other gifts, it’s best to set up a separate account to track this type of donation.
If the organization has a process and system to receive and distribute donated gift cards, then it is possible to positively impact the community in this way. Though there are several drawbacks and NFPs are generally advised to find other ways to make an impact or to show appreciation.
The Benefits of a Written Policy
It may also be worthwhile to use this situation as an opportunity to create a gift acceptance policy if one does not yet exist. Perhaps it doesn’t make sense for the NFP to accept gift cards because their accounting system isn’t set up to accurately track and record them. The same way that not every NFP can use vehicle or real estate donations, not every organization can use gift cards. If a gift acceptance policy is in place, the organization should have Schedule M on their Form 990 completed.
On the flip side, it might be advantageous to have a written policy of how volunteers or employees are recognized and what constitutes an acceptable (and tax-free) gift, and what situations are suitable for gifts that would require extra documentation.
Have questions related to your unique situation?
Not-for-profit organizations may still have questions about accepting or using gift cards as part of a recognition program or to give to families in need. Every situation is unique. Not-for-profit leaders and their Boards of Directors are encouraged to reach out to Bo Garner, CPA, MBA, Partner and Not-for-Profit Team Leader at PBMares.