This section explains some of the unique rules that apply to charitable contributions such as cash and non-cash such as car donations; and and property donations, which are different from non-cash contribution.
The most common kinds of donations are outlines below.
Business Expenses of Some Public Employees
Employee business expenses are usually deducted as a miscellaneous itemized deduction. However, these deductions are limited to those that exceed 2% of a taxpayer’s AGI, and as a result, these deductions may be reduced or eliminated altogether.
However, certain taxpayers (like teachers who work for the public school system), may treat their expenses as a charitable contribution, thereby eliminating the 2% limitation. The IRS allows deductible contributions of cash or goods to the U.S. Government or state agencies including political subdivisions such school districts and police departments.
Charitable Contribution Substantiation Rules
Cash contributions of any amount have to be substantiated with written communication from the donee which includes the name of the charitable organization as well as the date and amount of the contribution. These rules allow the IRS to easily audit a taxpayer’s charitable contributions by correspondence.
Depreciation of Capital Assets
Taxpayers are not permitted to take as a charitable deduction the depreciation of a capital asset. These kinds of assets include vehicles and computers.
Foreign Charities (including Canadian, Mexican, Israeli)
Taxpayers are not permitted to take deductions for contributions to a foreign charity. However, donations to U.S. charities that perform part of their charitable function outside the U.S. are deductible. Notable exceptions to this rule are Mexican, Canadian, and Israeli charities.
Some Canadian charitable organizations are covered under an income tax treaty with Canada, and contributions to these charities are deductible. However, in order to deduct the contribution, the taxpayer usually has to have income from sources in Canada.
Some Mexican charitable organizations are covered under an income tax treaty with Mexico, and contributions to these charities are deductible. The organization must meet certain requirements which are essentially the same as those that qualify U.S. organizations to receive deductible contributions. However, in order to deduct the contribution, the taxpayer usually has to have income from sources in Mexico.
Contributions made to certain Israeli charities organized under an income tax treaty with Israel may be deductible. The charity must be created and recognized as a charitable organization under Israeli law. The deductible allowed is the same as normally allowed, but no more than 25% of AGI from Israeli sources.
To find out if the foreign charity you wish to donate to qualifies for deductions, please contact us.
Gifts of Appreciated Capital
This type of property includes stocks and bonds, artwork, jewelry, coins, land, and other items that generally go up in value over time, rather than down. The deduction amount you can take depends on the kind of property, organization, and what they use it for. Gain property which is held for more than 12 months is subject to special rules, so contact a professional before claiming this deduction.
You may not make deductions for the charitable contribution of clothing or household items unless those items are in at least good used condition or better. You will have to obtain a receipt from the charity including the name of the organization, the date and location of the contribution, and a detailed description of the property. Additionally, you’ll need to make your own notes of the same information.
If your non-cash contribution is valued at $250 or more, the documentation you obtain from the charity must clearly state if you received any goods or services in return for your contribution, as well as the value of those services. Any non-cash gifts of property valued at $500 or more must be substantiated by records stating how and when the property was acquired and your cost or basis in the property. If your non-cash contribution is valued at $5,000 or more, you must obtain a qualified appraisal.
Personal Benefit Forfeited
To demonstrate this rule, we’ll cite a recent Tax Court case. During an audit, the issue of whether an unused benefit ticket can produce a charitable contribution. The taxpayers had purchased tickets to their daughter’s music recital, but did not attend. They then claimed the entire expense as a contribution.
The Court decided their failure to attend did not increase their contribution, as acceptance of the ticket “creates an expectation that taxpayer will attend and assert the right to be seated.” The school thus prepared for their attendance. According to the court, “The taxpayer receives a material benefit merely by having the right to decide whether or not to attend.” Extending the logic of the above case to some to expenses such as car washes, pancake breakfasts, and other events that the taxpayer doesn’t intent to attend may mean that the IRS would not allow them to be claimed.
Personal Benefits are Non-Deductible
The IRS often attributes some personal benefit form donations for raffles, benefit dinners, and church school tuition. You may deduct contributions of cash or property, but only to the extent you received no personal benefit from the donation. First, determine the Fair Market Value of the “personal benefit” item from the cost of your donation. Then, deduct the remainder.
Tax Breaks for Volunteers
Do you volunteer your time for a charity? Then you probably qualify for some tax breaks.
Although you may not claim a deduction for the value of the services you perform for a charity, you may claim deductions for out-of-pocket costs incurred while performing the services. Typical deduction limits and substantiation rules apply. Below are just a few examples:
– Away-from-home travel expenses incurred while performing services for a charity (such as out-of-pocket round-trip travel cost, taxi fares, lodging, and meals) are only deductible if the primary purpose of the trip was to perform services for the charity and those services do not involve lobbying activities.
– Expenses incurred in entertaining others on behalf of a charity (such as wining and dining a potential contributor). Keep in mind that the cost of your own entertainment or meal is not deductible.
– If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services (like gas and oil, parking fees, and tolls).
– If you wear a uniform you wear while performing volunteer work for a charity, you may deduct the expenses for the purchase and cleaning of that uniform.
Quid Pro Quo Contributions
Quid pro quo contributions are payments made partly as contribution and partly as payment for goods or services. Such contributions do not include any payment made to an organization organized exclusively for religious purposes, in return for which a taxpayer receives a solely intangible religious benefit that generally isn’t sold in a commercial transaction. Charitable organizations must inform donors that “quid pro quo” contributions over $75 are deductible only to the extent that the gift exceeds the Fair Market Value of the goods or services provided.
Charities are required to provide a written statement in conjunction with quid pro quo donations giving the donor a good-faith estimate of the value of the goods or services included with the gift.
This deduction can be made for the cost and upkeep of uniforms that are not suitable for everyday use and that must be worn while performing donated services for a charitable organization.
What is a Charitable Organization?
Money or property that you gift to “qualified” charitable organizations can be included in your itemized deductions as a charitable contribution. But what exactly is a “qualified” charity?
IRS Publication 78 lists all qualified organizations:
– Certain Canadian and Mexican charities allowed by treaty
– Certain organizations that foster national or international amateur sports competitions
– Churches, temples, mosques, synagogues, and other religious organizations
– Domestic fraternal societies, orders, and associations operating under the lodge system.
– Federal, state, and local governments (if your contribution is solely for public purposes) which may include local government, Indian tribal government, public schools, and governments of U.S. Possessions
– Nonprofit schools and hospitals
– Nonprofit volunteer fire companies, civil defense organizations, and public parks and recreation facilities
– Organizations which are operated for charitable purposes, such as the Boy Scouts, Girl Scouts, Salvation Army, Red Cross, Goodwill Industries, and United Way
– War veterans’ organizations (auxiliaries, posts, trusts, or foundations organized in the United States or any of its possessions)
If you have questions regarding a specific charity or charitable contribution, please feel free to inquire with this office.