With the first year under the new tax law behind them, your contributors may be looking to structure their charitable giving in new ways. Although the deductibility of most gifts hasn’t changed, some of the record keeping requirements have. Helping your donors understand the requirements and benefits of their gifts to your not-for-profit organization will help strengthen those relationships.
We will discuss allowable tax deductions, whether donors’ tax basis (usually original cost) or fair market value (FMV) for non-cash donations, and record keeping requirements and reporting for your donors, both individuals and business entities.
Donors’ Allowable Deduction by the “Types” of Property
Ordinary-Income Property
Property is ordinary-income property when the donor would recognize 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.
Deduction is usually limited to the donor’s tax basis in the property (usually the amount the donor paid for it). Specifically, if the property is sold at FMV, the donor can deduct the property’s FMV less the amount that would be ordinary income or short-term capital gain.
Capital-Gain Property
Donors can usually deduct the property’s fair market value. But there are certain situations where only the donor’s tax basis of the property may be deducted (assuming it is less than FMV), such as, when the donation is intellectual property (for instance, a patent or copyright) or, interestingly, certain taxidermy property.
Donors’ Allowable Deductions Determined by the “Use” of Property
If your organization 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. However, if the property is put to an unrelated use; or 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.
Vehicle Donation Limits Vary
Generally, if a vehicle has a 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 your organization 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 IRS Form 1098-C Vehicle Deduction, which your donor must attach to his or her tax return to take the deduction.
Allowable Deductions of Certain Costs of Donated Services
Your 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. However, the related out-of-pocket costs, such as supplies and miles driven for charitable purposes, are deductible as charitable contributions. The 2019 standard mileage rate is 14 cents per mile, same as last year.
Deduction Guidelines for Right to Use Property
Say a supporter donates a one-week stay at his vacation home for an auction. Unfortunately, he can’t take a deduction. Why? Because, generally, only donations of a 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 contribution.
Record keeping and Disclosure Requirements to Inform Donors
For donation of a noncash gift, the substantiation requirements depend on the deductible value. Less than $250, a receipt is sufficient. More than $250, a contemporaneous written acknowledgment is required. More than $500 (for individual, partnership, or S-corporation), or $5,000 (for certain C-corporation), donor must also file IRS Form 8283 Noncash Charitable Contributions Explanations, to disclose the gift. Each payroll deduction amount of $250 or more is treated as a separate contribution for purpose of the $250 threshold requirement for written acknowledgments. Any gifts over $5,000 in value also require a qualified appraisal.
Keep Donors on Board
While tax education may seem beyond your responsibility, you can add value by keeping your donors informed. Taking the time to make sure your donors understand the tax implications and requirements of their gifts can avoid unpleasant surprises down the road. And this will help keep donors on board as long-term supporters.