All Charitable Deductions Aren’t Created Equal

With the end of the year quickly approaching, your supporters may be planning to make charitable contributions that are deductible on their 2017 federal tax returns. If you want to keep those supporters on a long term basis, though, you should explain that different types of donations have different tax benefits — and some donations aren’t deductible at all.

What Can — and Can’t — They Deduct?

Generally, contributions of money or property are deductible. The type of the donation dictates the amount of the allowable deduction as follows:

Cash. Donations of cash are fully deductible, including donations made by check, credit card or payroll deduction.

Ordinary income property. Donations of this type are generally limited to the donor’s tax basis in the property (usually the amount the donor paid for it). Specifically, donors are allowed to deduct the property’s fair market value less the amount that would be ordinary income or short-term capital gains in the event they sold the property at fair market value (“FMV”).

Property is ordinary income property when the donor recognizes ordinary income or short-term capital gains if he or she sold it at FMV on the date of donation. Examples of ordinary income property include inventory, donor-created works of art, and capital assets (for instance, stocks and bonds) that are held for one year or less.

Capital gains property. Donors of capital gains property can usually deduct the property’s fair market value. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held for longer that one year. However, there are certain times where only the donor’s tax basis of the property can be deducted, such as when the donation is intellectual property (for instance, a patent or copyright) or “certain taxidermy property.”

Tangible personal property. As the name suggests, tangible personal property is able to be seen or touched. Examples of tangible personal property include furniture, books, jewelry and paintings. If the donated property is used by a non-profit organization for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is utilized for an unrelated purpose — for example, a not-for-profit children’s hospital sells the donated painting at its charitable auction — then the deduction is limited to the donor’s basis in the property.

Vehicles. Generally, if a vehicle has a fair market value greater than $500, the donor is allowed to deduct the smaller of the gross proceeds from its sale by the organization or the FMV on the donation date. Conversely, if the nonprofit uses the vehicle to carry out its tax-exempt purpose — for instance, an animal welfare organization that uses a donated van to transport rescued dogs and cats — the donor can deduct the FMV. The organization is required to provide Form 1098-C, which the donor must attach to his or her tax return in order to take the deduction.

Use of property. In a situation where a supporter donates a one-week stay at his vacation home for an auction, for example, the donor unfortunately can’t take a deduction because generally only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. There are some situations, however, in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation easement.

Donors also might want to claim a deduction for donating their services, such as when a hair stylist donates one free haircut and color for your auction, or a graphic designer lays out each issue of your quarterly newsletter at no charge. These types of donations are not deductible as contributions, only as normal costs of doing business. However, the related out-of-pocket costs, such as supplies and miles driven for charitable purposes (14 cents per mile), are deductible as charitable contributions.

Help Donors Help You Out

Be aware that there are additional limits on charitable deductions. (See “What other limits apply to charitable deductions?”) In addition, proposed tax law changes could affect charitable deductions, though this is not likely for 2017. Therefore, keep an eye on developments in Washington, DC.

While tax education may seem beyond your responsibility, you can’t afford to disgruntle your donors. Taking the time to ensure that your donors understand the tax implications of their gifts can help to avoid unpleasant surprises down the road, and maintain donors on a long-term basis.


Sidebar: What Other Limits Apply to Charitable Deductions?

As you probably know, there’s a limit to the amount of charitable deductions a taxpayer can take in a given year. The taxpayer’s total deduction generally can not exceed 50% of his or her adjusted gross income (“AGI”). (A higher limit applies for certain qualified conservation contributions.) But donations of capital gains property are generally limited to 30% of AGI.

In some cases, the limits are lower. For example, deductions for contributions to certain private foundations, veterans’ organizations, fraternal societies and cemetery organizations are limited to 30% of AGI. And capital gains property contributions to such organizations are limited to 20% of AGI.

© 2017

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