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The rules for deducting most charitable gifts haven’t changed since the implementation of the Tax Cuts and Jobs Act; however, some recordkeeping requirements have. Some of your donors may need help understanding the rules and benefits of their gifts, especially if they itemize their deductions. Helping them with the specifics can strengthen your financial ties with them — and may also help increase contributions.
What deductions are allowable?
Generally, donors can deduct up to 60% of their total contributions of money or property based on their adjusted gross income. Additionally, the amount of the allowable deduction can vary, but cash donations are 100% deductible if the donor maintains proof of the deductions. Acceptable evidence of cash donations can include bank records or thank-you letters from your nonprofit.
Donations of ordinary-income property usually are limited to the donor’s tax basis in the property, which is often the purchase price. Specifically, donors can deduct the property’s fair market value (FMV) minus the amount that would be ordinary income. Donors may also deduct the amount of short-term capital gains if the property is sold at fair market value. Property is considered ordinary-income property when donors can claim ordinary income or short-term capital gains if they sold it at FMV on the date of donation.
When does FMV apply?
Anyone who donates capital gains property is usually able to deduct the property’s FMV. The property could be considered capital gains property if the donor could have received long-term capital gains if the property had been sold at FMV on the date of donation. This can include capital assets that have been held for more than one year. But in some circumstances, for example, when the gift is intellectual property, only the donor’s tax basis of the property may be claimed as a deduction.
If your nonprofit uses the tangible property that has been donated to support the nonprofit’s specific tax-exempt purpose, the donor can deduct its fair market value. However, if the property is assigned to an unrelated use, such as choosing to sell the donated painting, the tax deduction is limited to the donor’s basis in the property.
For donations of property, the proof requirements depend on the deductible value of the gift. If someone donates an item worth:
- Less than $250, only a receipt is needed.
- Between $250 and $500, the donor must have written acknowledgment.
- Between $501 and $5,000, the donor must also file Form 8283.
- More than $5,000, the donor must obtain a qualified appraisal of the property.
Requirement for other donations?
For the most part, only donations of the full ownership interest in property are deductible. However, the right to use property is considered a contribution of less than the donor’s entire interest in the property. There are some situations in which a donor can receive a deduction for a partial-interest donation, especially with a qualified conservation contribution.
However, donors can’t claim a deduction for the donation of their professional services, but all related out-of-pocket costs, such as supplies purchased and miles driven, can be considered deductible as charitable contributions.
Are you Looking out for their interests?
Take time to make sure your donors understand the tax implications of their gifts. Providing them with clarity about the rules can help them avoid painful surprises down the road — and keep them loyal to your nonprofit. JLK Rosenberger can help you manage all the details. For more information, please call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.