Archive for Charitable Contribution
Please refer to IRC 170 as well as Publication 526, Charitable Contributions (PDF), Publication 561, Determining the Value of Donated Property (PDF), and Publication 1771, Charitable Contributions Substantiation and Disclosure Requirements (PDF) for detailed information on charitable contributions. This is what I’ve learned about issues involving charitable contributions of artwork that tax examiners focus on:
1. The charitable contribution deduction for artwork by Art Galleries, Dealers or the Artist who created the artwork is generally limited to the smaller of fair market value on the date of contribution or its adjusted cost basis taking into consideration cost of goods sold to prevent a double deduction.
2. A charitable contribution deduction is generally based upon the fair market value of the property at the time of the contribution. If a sale of donated property would have generated ordinary income or a short term capital gain, the amount otherwise deductible is reduced by the amount of ordinary income or short term capital gain that would have been recognized.
3. As stated in IRC § 1.170A-4(b)(1): “The term ‘ordinary income property’ means property any portion of the gain on which would not have been long term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization. Such term includes, for example, property held by the donor primarily for sale to customers in the ordinary course of his trade or business, a work of art created by the donor *** ”. IRC § 1221(a)(3)(A) excludes from treatment as a capital asset property in the possession of the person who created it. In other words art created by an artist and sold by the artist is treated as ordinary income.
4. Artwork donated to a charitable organization by an Art Gallery owner or a Dealer in artwork creates a consideration as to whether the artwork being donated is actually held as an investment or is inventory of the owner. The difference being that a charitable contribution deduction for the long-term capital gain property is generally its fair market value, while the deduction for a contribution of inventory is limited to the lower of cost or fair market value.
5. The deduction for artwork that was gifted by the artist who created it to the investor is generally limited to the smaller of the gift basis or the fair market value on the date of the charitable contribution.
6. Appraisals and Valuations
All taxpayer cases selected for audit that contain artwork with a claimed value of $50,000 or more per item must be referred to the IRS’ Art Appraisal Services for review by the Commissioner’s Art Advisory Panel. IRM 4.48.2 provides this mandate and the procedures and information needed to make the referral can be found in IRS Rev. Proc. 96-15. Generally the best course of action is to request a review of art valuations for income, estate, and gift returns and subsequently obtain a Statement of Value from the IRS prior to filing the return. Even if the value is under $50,000, the Art Appraisal Services will assist the examiner upon request.
A written acknowledgment from the person making the donation is required for donations of $250 or more. For claimed charitable contributions over $500, IRS Form 8283 must be attached to the return and the taxpayer must maintain certain records.
For a charitable donation of property in excess of $5,000 the donor has an additional requirement of obtaining a “qualified appraisal”. IRS Form 8283 requires that the appraisal for donated art valued at $20,000 or more must be attached to the return. For property valued at more than $5,000, an appraisal summary must be attached to the return. Appraisals in the entirety for art valued in excess of $500,000 must be attached to the return. The specifics of “qualified appraisal” requirements as well as “appraisal summary” and other related requirements can be found in IRS Notice 2006-96 and 2006-45 IRB 902.
A charitable donee is required to file IRS Form 8282 if it sells, exchanges, or otherwise disposes of (with or without consideration) charitable deduction property (or any portion) within 3 years after the date the original donee received the property. The form is filed with the IRS and provided to the donor of the property. A third party contact should be considered to determine if the form 8282 was required and not provided.
In order for a taxpayer to claim a deduction for the full fair market value of tangible property donated to charity the property must be used by the charitable organization in a way that is related to its charitable purpose. For example art is generally treated as ‘use property’ for an art museum, and perhaps a school, but probably not necessarily for a rescue organization.
It is possible to claim a deduction for a donation of a fractional interest in art, but immediately before the donation the property must be wholly owned by the donor or shared by the donor and the charity. Special valuation rules apply to subsequent fractional gifts. The deduction may be recaptured if the gift is not completed within the earlier of 10 years after the initial fractional gift or the date of the donor’s death.
Section 6695A imposes penalties on appraisers in certain circumstances. Section 6662 provides accuracy related penalties on the donor.
7. Examiners consider whether corporate officers are unreasonably compensation for the duties performed when large artwork transactions are reported by corporations.
8. Examiners investigate as to whether travel is not personal in nature as travel is usually a significant item in the art and art gallery industry. Gallery owners and artists alike tend to travel to buy, sell, and track art. Only the owner’s travel expenses are deductible, NOT the expenses of family members. Trips to vacation locations such as Hawaii, California, Florida, or Colorado have the potential to be personal in nature, and are usually disallowed.
This post is a brief review of IRS Publication 526. Basically if your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Don’t get duped. You cannot deduct contributions made to specific individuals, political organizations or candidates.
Regardless of the amount donated when deducting a contribution to a qualified organization be sure to maintain a bank record, payroll deduction record or a written communication from the organization containing the name of the organization and the date and amount of the contribution as substantiation in your tax file showing specifically the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.
The deduction is claimed by filing IRS Form 1040 and itemizing deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. If you donate an item or a group of similar items valued at more than $5,000 you must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
Donations of stock or other non-cash property are usually valued at the fair market value of the property as of the date of the donation. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Special rules apply to vehicle donations.
Check out Mitt Romney’s 2010 tax return and learn how he does it. The most important lesson I learned in perusing his return (besides the significance of sheltering your $$ outside of the USA) is the immediate impact of targeted charitable contributions. In my professional opinion the absolute best way to reduce your tax liability is to make charitable donations of money or property. Also you can try to:
Avoid salary, wagesand tips if you can. Instead generate income from long-term capital gains
Avoid Muni-bond interest. It triggers Alternative Minimum Tax (AMT) making this investment vehicle laughable at best for the truly wealthy
Pursue Qualified dividends. They are essentially ordinary dividends that meet the requirements to be taxed as net capital gains. Check out Publication 550, Investment Income and Expenses
Avoid the home-office deduction. It offers a small tax benefit requiring large tax prep effort (aka $$). Usually not worth the time and effort.
Itemizing deductions is probably not worth the personal disclosure required
Beware that capital gains and dividends can also trigger the AMT
Offshore investments are abusive because they rob the US Treasury of much needed tax revenue. Basically the US Tax Code encourages the wealthy to invest OUTSIDE OF THE UNITED STATES which is so backwards it makes my head spin.
Now is a GREAT TIME OF YEAR TO MAKE A CHARITABLE DONATION if you are so fortunate. When you make a donation to a charity you may be able to take a deduction for it on your tax return as long as you secure the proper documentation substantiating the donation and its subsequent value. In route to making your charitable contribution decisions ….
Make sure the organization qualifies Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check IRS Publication 78, Cumulative List of Organizations.
Check for the list of organizations whose Tax Exemptions have been Revoked
What you can deduct You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats. This is done on page 2 of Schedule A of IRS Form 1040.
When you receive something in return If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.
Record keeping Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution and the name of the organization.
Pledges and payments Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, you can only deduct $200.
Donations made near the end of the year Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
Large donations For any contribution of $250 or more, you need more than a bank record. You must have a written acknowledgment from the organization. It must include the amount of cash and say whether the organization provided any goods or services in exchange for the gift. If you donated property, the acknowledgment must include a description of the items and a good faith estimate of its value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. If you claim a deduction for a contribution of noncash property worth more than $5,000, you generally must obtain an appraisal and complete Section B of Form 8283 with your return.
Tax Exemption Revoked Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization’s automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions.
Other Links Worth Checking Out:
The IRS has released Form 8940, Request for Miscellaneous Determination that tax-exempt organizations will use to request certain determinations about their tax-exempt status. In addition to foundation status issues, organizations will use this new form to obtain advance approval of certain activities and exemption from IRS Form 990 filing requirements. Organizations applying for recognition of exemption and at the same time requesting advance approval of scholarship procedures or exception from filing Form 990 should include their request with their Form 1023, Application for Recognition of Exemption Under Section 501(c)(3), rather than file Form 8940.
The simple one-page form is accompanied by instructions that specify what information is required to support each of the nine types of requests that may be submitted. A user fee must accompany most requests.
Under IRC §170(c)(2)(A) generally speaking when a trust uses its income to buy an asset and in a later year gives that asset to a charity it is allowed a charitable deduction. Chief Counsel Advice 20104202 stipulates however that if the deduction was not limited to the trust’s basis in the assets, the contribution of low-basis property would yield a double tax advantage because the trust would be able to avoid tax on the potential gain and it would be able to deduct not only the basis but also the gain from gross income.
In other words trusts generally speaking may take a charitable deduction for real property donated equal to the trust’s cost basis in the property assuming that the property in question was purchased with income generated from the trust.