All Charitable Deductions Aren’t Created Equal
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With the end of the year on the horizon, your supporters may be thinking about making charitable contributions they can deduct on their 2017 federal tax returns. If you want to keep those supporters on your side, though, you need to explain that different types of donations can carry different tax benefits — and some donations aren’t deductible at all.
What can — and can’t — they deduct?
Generally, donors can deduct contributions of money or property. The amount of the allowable deduction varies based on the type of donation:
Cash. Cash donations are 100% 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 can deduct the property’s fair market value less the amount that would be ordinary income or short-term capital gains if 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 include inventory, donor-created works of art, and capital assets (for example, stocks and bonds) 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 more than one year. But there are certain situations where only the donor’s tax basis of the property may be deducted, such as when the donation is intellectual property (for instance, a patent or copyright) or, interestingly, “certain taxidermy property.”
Tangible personal property. As the name implies, tangible personal property can be seen or touched. Examples include furniture, books, jewelry and paintings. If your nonprofit uses the donated property 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 put to an unrelated use — for example, a not-for-profit children’s hospital sells the donated painting at its charitable auction — the deduction is limited to the donor’s basis in the property.
Vehicles. Generally, if a vehicle has an FMV greater than $500, the donor can deduct the lesser of the gross proceeds from its sale by the organization or the FMV on the donation date. But 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. Make sure you provide Form 1098-C, which your donor must attach to his or her tax return to take the deduction.
Use of property. Say a supporter donates a one-week stay at his vacation home for an auction. Unfortunately, he 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. But there are some situations 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 the donation of 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 for free. These types of donations aren’t deductible as contributions, only as normal costs of doing business. But 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?”) And proposed tax law changes could affect charitable deductions, though most likely not for 2017. So keep an eye on federal developments in Washington.
While tax education may seem beyond your responsibility, you can’t afford disgruntled donors. Taking the time to make sure your donors understand the tax implications of their gifts can avoid unpleasant surprises down the road, and keep donors on board as long-term supporters.
What other limits apply to charitable deductions?
As you probably know, there’s a limit to the amount of charitable deductions a taxpayer can claim in a given year. The taxpayer’s total deduction generally can’t 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 even 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.