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Debbie  Mitchell
Debbie Mitchell

Charitable Contribution Options

Why limitations and documentation requirements should be researched when contemplating a significant noncash donation.

October 13, 2011
by Debbie Mitchell, CPA, MST

While most taxpayers are familiar with the process for deducting charitable contributions involving cash, many are not familiar with the rules for deducting charitable contributions of property. There are several options involving the contribution of property that are available, with different limitations and methods of valuing the donation.

General Limitations on Deduction Amounts

Limitations apply on the charitable-contribution deductions taxpayers can take for contributions of property, depending on both the type of property contributed and also on the type of charity receiving the property.

Generally, charitable deductions for donations of cash and property (other than long-term capital gain property) are limited to:

  • 50 percent of adjusted gross income (AGI) if contributed to a 50 percent charity
  • 30 percent of AGI if contributed to a 30 percent charity

Charitable deductions for contributions of long-term capital gain property are generally limited to:

  • 30 percent of AGI if contributed to a 50 percent charity
  • 20 percent of AGI if contributed to a 30 percent charity
  • Individuals are subject to the 50 percent limitation rather than the 30 percent of AGI limitation for tax years 2006 through 2011 conservation contributions if they are made to a 50 percent charity.

For the years 2006 through 2011 contributions of conservation property by a qualified farmer or rancher (a taxpayer whose gross income is more than one half from farming) with the stipulation that the property is available for agricultural or livestock production is limited to:

  • 100 percent of AGI

An individual may carry forward any contributions not allowed because of the AGI limitation for five years. In addition, there is currently an extended carryover period for qualified conservation contributions, from the five years to 15 years.

Charitable organizations included in the 50 percent charity category include, but are not limited to:

  • Churches
  • Schools
  • Hospitals
  • Governmental entities
  • Private operating foundations
  • Other nonprofit agencies organized for charitable, religious, education, scientific and literary purposes that receive a substantial part of their support from contributions from the general public or government entities

Charitable organizations included in the 30 percent charity category are:

  • Veterans organizations
  • Domestic fraternal societies
  • Nonprofit cemeteries
  • Certain private foundations

Valuing Noncash Contributions

Amounts allowed as charitable contributions for noncash transactions differ depending on type of property. Below are some examples of the limitations for different types of donations.

Ordinary income and short-term capital gain property. Taxpayers may make contributions of ordinary income property and short-term capital-gain property. The deduction is limited to the fair market value (FMV) of the property, less any gain that would not be long-term capital gain provided if the property was sold for FMV at the time of the contribution, regardless of the type of charity receiving the donation. An example of this type of property would be an item of inventory.

Long-term capital gain property. For long-term capital gain property that is tangible personal property, the amount of allowable charitable deduction depends on the charity’s use of the property. If the charitable organization is using appreciated tangible property for the organization’s exempt purpose, FMV at the time of the gift may be deducted. The organization must use the property in this capacity for three years, or the deduction will be subject to recapture. If the property is used for an unrelated purpose, a deduction is allowed for the FMV of the property less the long-term capital gain that would be realized if the property was sold for FMV at the time of the contribution.

For long-term capital gain property such as stocks, mutual fund shares and real estate fair value at date of gift is used. However, if the charity is a private foundation (other than a private-operating foundation), the deduction is limited to FMV less the amount of gain that would have been long-term capital gain if the property had been sold at its FMV at the time it was contributed. However, a taxpayer can deduct the FMV of qualified appreciated stock donated to a private foundation.

In the case of long-term capital gain property, donors have the option to make an election to limit the charitable deduction to their basis in the property at the time of gift, in order to increase the allowable AGI percentage.

Qualified Intellectual Property. Donation of qualified intellectual property is limited to the lesser of the donor’s basis or FMV. This includes intangibles such as patents, certain copyrights, trade names and certain software.

Motor vehicles, boats and airplanes. Special rules apply to vehicles such as motor vehicles, boats and airplanes. Any donation over $500 needs a contemporaneous written acknowledgment from the charity. The amount of the charitable contribution depends on the charity’s use of the vehicle. If the organization sells the vehicle, the taxpayer can generally deduct the lesser of the sale price or FMV. If the charity uses the vehicle to further the exempt purpose of the organization, the FMV is deductible.

Determination of Fair Value

One of the challenges encountered with noncash contributions is determining the fair value. In the case of publicly traded stock, the average of the highest and lowest quoted selling price for the day is used. In the case of real estate, appraisals are obtained. In the case of clothing and household goods, the thrift shop value should be used. The taxpayer must obtain a qualified appraisal if the claimed deduction is more than $5,000. The burden of proof for determining fair value lies with the taxpayer.

In the case of property that has decreased in value, the contribution is still limited to the FMV at the time of gift. Since the taxpayer is not able to recognize a loss in this case, it would usually be beneficial to sell the property prior to making the gift and donate the cash to the charity.

Conservation Easements

A qualified conservation contribution is a contribution by a taxpayer of a qualified real property interest to a qualified charity exclusively for conservation purposes. The property generally may not be subject to a mortgage.

The following are instances of conservation purposes:

  • Outdoor recreation
  • Saving natural habitat
  • Preservation of open space
  • Historical value

The landowner still maintains the following for the land:

  • Ownership
  • Control
  • Enjoyment

When a taxpayer donates a conservation easement, they can deduct the FMV of the easement, if it is donated to a qualified organization that uses the easement exclusively for conservation purposes. The basis of remaining property must be reduced by the amount of basis allocated to the easement.

This fair value may be determined by:

  • Sale of comparable easement or
  • Determination of FMV before and after the easement. The difference is the contribution amount.

It is important to keep in mind that the rules on the type of property still apply to conservation easements; therefore if the property on which the easement is granted is short-term capital-gain property the deduction would be limited to the basis rather than fair value.

If granting an easement actually increases the fair value of the property, no deduction is allowed.

Conclusion

There are different limitations and documentation requirements for donors on deducting charitable contributions related to types of property donated and the organizations to which they are contributed, especially in the area of noncash contributions. When contemplating a significant noncash donation, these limitations and documentation requirements should be researched.

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Debbie Mitchell, CPA, MBA, MST, is a principal with Braver PC Accountants and Advisors.