It is common for taxpayers to donate property to charitable organizations. There are many important rules to be aware of when making noncash contributions – an area that the IRS is scrutinizing with greater focus.
Regardless of what type of property has been donated, the taxpayer is generally entitled to a deduction equal to the fair market value of the property at the time of the contribution. The most prevalent property donation involves clothing and household goods, whether donated to national organizations such as The Salvation Army and Goodwill Industries, or to local thrift shops and religious institutions. In order to claim a deduction for donations of clothing or household goods they must be in good used condition or better.
IRS Form 8283, Noncash Charitable Contributions, must be filed if claiming a total deduction of over $500 for all contributed property. If claiming a deduction for donated property of $500 or less, it is merely entered on Schedule A and no details regarding the donation need be reported. Donations reportable on Form 8283 require the donee name and address, a description of the donated property, dates of acquisition and contribution, manner in which the property was acquired, cost basis, fair market value, and method used in determining the value.
The IRS is clearly concerned with taxpayers inflating the value of donated property. If a deduction is being claimed for more than $5,000 of property other than publicly traded securities and the donated property is a group of similar items, an appraisal must be obtained from a qualified appraiser who must sign Form 8283 under penalty of perjury. In addition, the charitable organization receiving the donated property must complete a donee acknowledgment section of Form 8283. An appraisal will often be required for donations of items such as artwork, boats, and real estate. If a donation is made to a single charity consisting of $2,000 worth of clothing and $4,000 worth of furniture, then no appraisal is required as the donation was not made for more than $5,000 of items falling within the same category. However, if a donation of furniture worth $6,000 is made during a year, whether donated to one or multiple charities, an appraisal would be required.
The exception to claiming a deduction for a property contribution at fair market value is when the donation is of “ordinary income property” which, if sold, would give rise to ordinary income or a short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held one year or less. Generally, this rule limits the deduction to the taxpayer’s cost basis. A special rule applies to donations of vehicles with a claimed fair market value exceeding $500. The deduction is limited to the lesser of the proceeds received by the organization upon sale of the vehicle or the fair market value. A Form 1098-C or other statement should be received from the donee organization and then attached to Form 1040. The vehicle identification number must be entered on Form 8283.
All donations, whether made by check or consisting of property worth $250 or more, require an acknowledgment from the donee organization. Acknowledgments are retained by the taxpayer in the event of any future IRS inquiry. Acknowledgments from charitable organizations do not need to be attached to Form 1040. IRS Publication 526, which can be accessed from the IRS website, is a useful resource on this subject.
Neil Becourtney, CPA