When preparing tax returns, a frequent item of discussion with my clients revolves around charitable contributions. Some of my clients seem to believe that any transaction they have with a charity entitles them to a contribution deduction. This, of course, is not true so what follows is a primer of some of the actual rules regarding claiming charitable contributions.
These types of donations generally do not result in a deduction:
- Gifts to individuals (including “GoFundMe” or funds raised to help someone alleviate medical costs, etc.) are not deductible even if the check is made to the “Jane Doe Medical Fund” because individuals are not charitable organizations under the tax code. The good news is that they are usually not taxable to the recipient but neither are they deductible to the giver.
- Gifts to organizations that are not qualified to receive tax deductible contributions under the Internal Revenue Code. The tax code only recognizes certain organizations as qualified to receive tax deductible contributions. In general, these organizations are schools, hospitals, churches, governments and political subdivisions thereof, and 501(c)(3) organizations. The latter are organizations that have gone through a process of requesting and being granted such status by the Internal Revenue Service. Donations to nonqualified organizations are not deductible even if the funds are ultimately going to a charitable cause.
- Gifts of services. While laudable, a gift of your time and effort does not result in a charitable deduction. This is because such a gift does not result in a transfer of money or goods between you and the recipient. Your net worth is not reduced by the gift. Your time has no tax value unless you are paid for it. If the charity pays you for your services and you turn around and give it back to them, that would result in a deduction. However, as you would have to record their payment as income, it would be at best a wash for tax purposes and would probably cost you more in taxes than is saved. It’s better to just donate your services.
- Giving the use of something you own. I usually see this in the form of a client giving a week’s usage of their ski chalet (or home or timeshare, etc.) to be auctioned by a charity. Again, while laudable, the value of the usage of your chalet is not a charitable deduction for you for the same reasons as the donation of your services is not a charitable deduction. However, if the usage of the chalet results in your incurring out-of-pocket costs such as cleaning or repair costs, those would qualify as a deduction.
- Goods purchased at a charitable auction. These are not deductible unless you pay more than the market value of the items being purchased. In this case, if the purchase price is more than $75.00, the charity is supposed to give you an acknowledgement letter which specifies what you paid and what the item was worth. Only a payment in excess of the worth of the item received results in a tax deduction. The charity should do its best to provide an accurate value of the item and if it can be bought in a store it should be relatively easy to do. However, determining the value of a bottle of Coppola wine signed by Francis Ford Coppola might be harder to discern. The IRS might argue that whatever you paid for the item established its value and therefore there is no deduction.
- Raffle tickets. The cost of purchasing raffle tickets is never deductible no matter who is selling them and how much you pay for them. The rule here is that a chance to win something of value is automatically deemed to be worth whatever you paid for it.
- Goods donated by a business that has already deducted the cost of the items as business expenses (by writing them off or having fully depreciated them). The problem here is that charitable contributions of goods are only valued at the lower of cost or tax basis unless they are capital gain property (where they can be deducted at their value even if this is above the cost or tax basis). As the business has written off the cost of the items, their tax basis is zero. And as they are business assets, selling them at a gain would result in ordinary income (except for real estate) and they are not considered capital gain property.
Now that you have determined that you have a deductible charitable donation, you still must adhere to the tax code many documentation rules. A few of these rules follow:
A) If the contribution is less than $250.00, you are required to have a cancelled check, bank record or a receipt from the charity. Cash donations are no longer deductible so if you put cash in the collection plate at your house of worship, be sure to use their envelopes so they can give you an acknowledgment letter at the end of the year. Better yet, for ease of proof, just put a check in the plate.
B) If the contribution is more than $250.00, you are required to obtain a written acknowledgement from the charity that specifies the amount of the donation and the value of any goods or services the charity gave to you in exchange for the donation. If the charity gave you no goods or services in exchange for your donation, the letter must affirmatively state that fact. You must have this acknowledgement in your possession prior to filing your tax returns. There is a special penalty for claiming a deduction of more than $250.00 without having the proper acknowledgement at the time of filing. This is one of the biggest failures I see in my practice. This requirement has been on the books for many, many years now and I still see local and recognizable charities sending out acknowledgement letters without the required language. The IRS and the courts are very serious about this one. There was a case a few years back of a man who gave real estate valued at more than $1 million and the acknowledgement letter did not have the proper language. In his opinion, the judge said he had no trouble believing that the taxpayer made the donation and that it was valued at the proper amount; however, the law requiring the timing of the receipt of a proper acknowledgement was unequivocal and the entire deduction was disallowed.
C) If you donate similar types of goods (other than money) which are valued at $5,000 or more, you must obtain an appraisal of the goods from a qualified appraiser who does not work for the recipient charity. This $5,000 limitation is for all donations made during year for the type of goods being given. Obviously, any donation of any type of goods valued at over $5,000 will require an appraisal. If you donate $3,000 of artwork and $3,000 of jewelry in the same year, neither will have to be appraised as they are different types of assets. However, two $3,000 donations of jewelry in the same year will require that both donations be appraised. This may be problematic if you were not aware at the time of the first donation that you would be making the second. Therefore, donations of this type and magnitude need to be adequately planned for.
D) Finally, if you incur expenses as a volunteer of a charity which you are not reimbursed for, these can be deducted if the charity acknowledges the fact. You should obtain an acknowledgement letter from the charity which specifies the type of expenses you incurred on their behalf but does not need to include the amount of the expenses. You will need to prove that with your receipts and cancelled checks. However, if you plan to claim $250.00 or more, be sure the acknowledgement includes the required language mentioned in B) above.
I hope this clears up much of the confusion over what is deductible, what is not, and what records you need to keep. If you still have questions about your particular situation, you should contact your tax advisor.