Things to Consider Before Making Non-Cash Charitable ContributionsFebruary 16, 2016
There are certain tax rules surrounding deductions allowed on non-cash donations.
Charitable contributions are a great way to help those in need with the added benefit of a tax deduction. Your contribution doesn’t have to be in cash to be eligible for a charitable deduction. Many qualified charities accept all types of property to benefit their charitable cause. You can cash in on a tax deduction by contributing unused property around your house. In your effort to save on taxes, don’t forget to consider the tax rules regarding the amount allowed as a deduction for certain types of non-cash donations.
Capital Gain Property (Appreciated Stock)
Charitable contributions are subject to a 50% of Adjusted Gross Income (AGI) limitation. Aggregate deductible contributions cannot exceed 50% of AGI. Any excess contributions are carried over for five tax years and are used on a first-in, first-out basis. Capital gain property, such as appreciated stock held for more than one year, is generally subject to either a 30% or 20% of AGI limitation. If the capital gain property is contributed to 50% charity, a 30% limitation applies. The most common 50% charities include churches, schools, and other nonprofit agencies organized for charitable, religious, or educational purposes. The 20% limitation on capital gain property is applied to those contributions that are made to non-50% organizations. The IRS’s offers a Select Check tool which categorizes qualified charitable organizations as 50% or non-50% organizations.
Contributions of capital gain property are normally measured by their fair market value on the date of the gift. Taxpayers can elect to use a 50% limitation rather than the 30% limitation on capital gain property contributed to a 50% charity. To do this, taxpayers must limit their deduction to the tax basis of the property instead of the fair market value. The election is irrevocable and would apply to all 30% limitation contributions in that year. This might be advantageous if the taxpayer wants to contribute capital gain property with only a small unrealized gain. By making the election, it may allow the taxpayer to deduct the full basis in the year contributed rather than a slightly larger deduction in a subsequent year. If the taxpayer is expected to have a lower marginal tax rate in a subsequent year, the slightly lower deduction now may be worth more.
Ordinary Income Property
Property is ordinary income property if it would have generated ordinary income or short term capital gain if you had sold it. Examples of ordinary income property include inventory, works of art created by the donor, and capital assets held one year or less. In most cases of donated property, the deduction amount is the fair market value of the property. However, the deduction allowed for a donation of ordinary income property is limited to your basis in the property. If possible, donations of substantially appreciated ordinary income property should be avoided. Since the deduction allowed is your basis and not the FMV, your deduction could be severely limited.
Example: Suppose you donate stock held for 9 months to your church. The fair market value on the day you donate the stock is $5,000, but you paid only $3,500 for it (your basis). The appreciation would be short-term capital gain if you sold the stock; therefore your deduction is limited to $3,500.
Depreciable property is property used in a trade or business for which a depreciation deduction is allowed. Property that has been depreciated is considered ordinary income property to the extent of any gain that would have been treated as ordinary income. The portion of the gain that relates to the depreciation taken on the asset must be recaptured as ordinary income. The same concept applies when the asset is donated. The deduction allowed is the fair market value less the amount that would be ordinary income if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.
Tangible Personal Property
Donations of tangible personal property are very common. This classification includes any property, other than land or buildings, which can be seen or touched. Examples of tangible personal property include items such as furniture, jewelry, paintings, cars, etc. It is important to understand how the charitable recipient of this property intends to use the property. If the donation is put to an unrelated use by the charitable organization, your deduction may be limited. Unrelated use is defined as use unrelated to the exempt purpose or function of the charitable organization.
Example: Suppose you donate artwork to the university you attended. If the school uses the painting by hanging it in the library to be displayed for educational purposes and to be studied by art students, then the use is not unrelated. However, if the school sells the painting and uses the proceeds for educational purposes, it is considered an unrelated use.
If the donated property is put to an unrelated use, you must reduce the fair market value by any amount that would have been long-term capital gain had you sold the property for its fair market value. In other words, if the fair market value was greater than your basis in the property, your deduction is limited to your basis.
Example: Suppose you donate your car to Kars4Kids and they immediately sell it for $1,000 (fair market value). If your basis in the car was $800, your deduction would be limited to $800 ($1,000 FMV less $200 gain). If your basis was $1,200 your deduction would remain $1,000 because you would have realized a loss if you sold the car for fair market value.
When donating tangible personal property, it is important to get a signed written statement from the charitable organization indicating that they intend to use the property for their exempt purpose. If the organization later sells the property within three years of your contribution, you may be required to recapture the amount of the deduction you claimed in excess of your basis as income.
Before making last minute donations to charitable organizations at year end, be sure to consider the type of asset being contributed from a tax perspective. However as with all tax planning, don’t let the tax tails wag the dog. If it is important to you to donate certain property or work with a specific organization, then that should take priority.
If you would like to discuss potential donations of property, please contact any member of our Private Client Services group.