Getting a product discount and donating to the same nonprofit?

Question

Okay, my children go to a religious elementary school which is a valid nonprofit organization.

I get a tuition discount from them.

Can I donate to the school and deduct the donation from my taxes? I know that I can't deduct tuition.

There is currently no agreement (written, oral, or even suggested) that a donation is any kind of compensation for my tuition discount.

My questions are:
1) Can I deduct the contribution?
2) Even if it is legal (or illegal) to deduct the contribution, what is the likelihood that the IRS would investigate myself or the school as a result of doing this?
3) Can I use my donations as a bargaining point for bigger tuition reductions in the future? Presumably, they would get more money if they lower my tuition and I donate more, due to tax deductibility.

-->Adam

The tuition deduction is need-based and arbitrary - they don't have a mathematical formula for deductions of this type.

The donations would not be large in comparison to others the institution receives.

Answer 1

1) Yes. A religious elementary school is by definition a charity.

2) Impossible to predict. If the IRS suspects the school is accepting donations in lieu of tuition, they will investigate further.

3) No. The school knows that if they do this it could lose its charity status. If your donations are in consideration of a tuition reduction, your donations are not deductible.

Answer 2

1. Donations to the school are tax deductible if the school qualifies as a charitable organization. The tuition you pay is not. You can deduct the contribution on your tax return.

You may be getting a discount because you enrolled more than one child. However if you are getting a discount because you made a big donation, tax law requires you to reduce your tax deduction for the donation by the fair market value of the discount.

2. There is a rather small likelihood that your tax return will be audited, and if it is audited, the donation would be allowed because the tax law permits it. There is probably a slightly higher likelihood that the school will be audited. In that case the IRS would probably look at the relationship between large donations and the tuition paid by the donor's children. If the IRS were to find that large donors pay much less tuition than other parents, the IRS could question the donations as sham transactions. An audit of the school could lead to an audit of the large donors.

3. Yes you can, but it would be illegal. A former colleague of mine went to a Catholic college. His father made large donations to the school and the son received scholarships which he used to pay the tuition. The scholarship is not taxable. In effect, the school made it possible for the father to finance the education and get a tax deduction.

The school may have been able to justify the scheme. For example, if the student merited the scholarship because he was earning high grades, and other good students whose parents don't make donations also receive similar scholarships, the school could show that it is not discriminating. But if scholarships are granted only to students whose parents make big donations, and especially if they include students who do not get good grades, the IRS would question the process.

Answer 3

If you donate to the school and they are an allowable charity, then yes you can deduct a contribution to them (not the tuition, which you already know). You can only deduct charitable contributions if you itemize.

I'd be very careful about tying your contribution to the amount of the discount. If the discount is set by the school and needs-based, not just arbitrary, you'd be OK deducting your donation, but if it looks like it's just a way to turn the non-deductible tuition into a deductible donation, you'd lose the deduction.

Answer 4

If the school is a registered charity you can deduct any charitable donations. Merely being a non-profit does not qualify the school as a registered charity, however.

If you get anything in return for a charitable donation (such as that tuition reduction) then the FMV of what you receive (the tuition reduction in this case) is NOT deductible.

Since you must list all charitable donations by recipient it's a virtual certainty that the IRS will catch any subterfuge. And if the school is a registered charity it's not likely that they'll play along with any scam of yours and risk their status.

Nice try, but it won't fly.