Noncash Donations: Know the Rules or Lose the Deduction

As we approach the end of the year, a recent Tax Court case serves as a good reminder of the court’s requirements for supporting documentation for a deduction for noncash charitable contributions that perhaps you’ve already made this year, or plan to donate in the coming weeks.

The taxpayer in the case claimed a deduction of almost $28,000 for three separate noncash donations to a charitable organization. The donated items consisted of clothes, household goods and furniture, and various electronic equipment, including computers and a printer. Because of the size of the donations, the taxpayer was subject to several documentation requirements related to substantiating donations. These included:

 

  • A need to obtain a written acknowledgment from the charity (required any time cash or noncash donations equal or exceed $250) describing the items donated and when; and stating either that no goods or services were rendered in return for the donation; or describing and valuing what the charity provided in return. The acknowledgment must be obtained by the time the tax return for the year of the donation is filed or due, whichever precedes.
  • A requirement to maintain documentation for noncash donations of the same or similar items (such as clothing, jewelry, furniture, electronic equipment, household appliances) exceeding $500 that: (a) indicates the appropriate date each noncash item was acquired, (b) includes a reasonably detailed description of the donated property and its condition, (c) estimates the purchase price of the item, (d) describes its current retail (usually second-hand or thrift-store) value, and (e) explains how this value was determined (e.g., from the Salvation Army’s online donation guide).
  • Finally, a requirement to have the noncash items appraised (by a qualified appraiser) because they were not publicly traded securities, and they collectively exceeded $5,000 for the same or similar items included in the donations.

Although the taxpayer had written acknowledgments, they unfortunately failed to make the grade, because they didn’t contain a description of the donated items (or contain a reference to separate attachments, with descriptions that were reviewed by the charity’s representative who received the donations). In addition, the taxpayer failed to provide photo documentation of the donated items to support their quality and condition (not a requirement, but it would have been helpful); and most importantly, the taxpayer failed to have a qualified appraisal prepared before the items were donated.

If the taxpayer had received a properly completed written acknowledgment by the required deadline, he might have at least salvaged a deduction of $4,999 or less. As it was, the Tax Court threw out the entire deduction.

This was certainly an unfavorable outcome for this taxpayer, but a helpful reminder that the IRS and the courts take the charitable donation documentation rules seriously.

Feel free to contact us if you have any questions about documenting your own noncash donations.

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