Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

The tax benefits of charitable contributions

- by Alan Duvall 

Published in Dayton Daily News July 2, 2006 

Considering “buying a stairway to heaven?”  If so, with knowledge of charitable tax rules the IRS “piper will lead us to reason.” 

Charitable contributions of cash and property may be federal tax deductible.  Not services.  Donating time to charity may be rewarded in heaven but not on tax returns.  Some consolation may emanate from a 14 cents per mile deduction for charitable-related transportation expenses. 

The consequence of cash donations is simple.  In contrast, maxims regarding property contributions can be quite complex. 

Generally, the fair value of donated property is deducted if less than original cost.  A new exception for auto vehicles was installed limiting deductions if the charity immediately resells the vehicle. 

With regard to appreciated property “there are two paths you can go by”.  If the sale of the property by the owner would generate ordinary income, deduction is limited to the item’s cost basis. 

Long-term capital gain property is deductible at its fair market value if put to use by the charity in a manner consistent with its non-profit function.   

For instance, art worth $5,000 with a cost of $1,000 may only elicit a $1,000 deduction if contributed to a food bank.  By comparison, a $5,000 deduction is possible if the art is contributed to a museum. 

The taxpayer above could sell the art and donate the $5,000 to charity for a deduction, but would have to pay additional taxes on the $4,000 gain in the process.  Obviously it's better to donate the appreciated property and avoid unnecessary tax implications from imbedded gains. 

Special tax rules should be consulted for business deductions of contributed intellectual, scientific, computer and inventory property to non-profit recipients.  

The IRS “sign on the wall” succinctly reads written documentation of the property’s cost, value and charitable use is critical to tax benefits “turning to gold”.    

“Cause you know sometimes words have two meanings” - carefully consult the tax oracle before making substantial charitable contributions of property.  Complicated world.  “Ooh it makes me wonder.”

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.