It's becoming routine to see court cases backing the IRS against taxpayers who trip over the rules when donating assets to charity. Checks are difficult enough. Any single contribution of $250 or more requires a written receipt from the charity at year's end, or the deduction becomes zero. Property has additional hurdles.
CAPITAL GAIN PROPERTY
The most favorable asset to donate to charity is generally property held over 12 months taxed as capital gain. Assets such as stocks, mutual funds and real estate are deductible at their market value. The taxpayer's historical cost is irrelevant. If the property is a publicly traded security, such as a mutual fund or listed stock, the current value on the date of transfer is readily determined and noncontroversial. But any other property, such as a parcel of farmland, must be appraised if the value exceeds $5,000. The charity might sell the asset a week after the donation, but the appraisal valuation determines the charitable deduction.
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The IRS has learned to closely scrutinize these appraisal situations because of the many detailed requirements that can disallow the deduction. For example, there are strict dates regarding the completion of the appraisal (no more than 60 days prior to the donation and not later than the filing of the tax return). The appraiser must be properly qualified, and the appraisal must state that it was completed for income tax purposes. Further, there is a disclosure form within the donor's income tax return, IRS Form 8283, that requires the appraiser's sign-off, various details regarding the property donated and an acknowledgment of receipt by the charity. Donors may cringe at all these requirements, but when the tax law allows a deduction for the inflationary gain on property, this rigor should not be a surprise.
TANGIBLE PERSONAL PROPERTY
The rules get much trickier when non-real estate property is donated. To claim a fair market deduction, tangible personal property must be retained by the charity for use in its exempt function. For example, a taxpayer who donates artwork to a museum for its collection may secure an appraisal and claim a market value deduction. But donate that same piece to a hospital for its annual auction, and the deduction is limited to historical cost.
DONATIONS OF UNSOLD GRAIN
Farmers have a unique opportunity with respect to their raised grain. An appraisal isn't required because there's no tax deduction for the contribution (technically, the deduction is limited to tax cost, but that is zero to a cash method producer who expensed all growing costs). The tax advantage is legal avoidance of the income and social security taxes for the self-employed that would otherwise trigger from the sale of the commodity. The key point is transferring title of the grain in unsold form and allowing the charity to execute the sale so there is no taxation to the donor. If the sale has been locked in on a deferred payment contract, it's too late for the contribution.
Tax Columnist Andy Biebl is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minn.
Andy Biebl can be reached at email@example.com