With the first year under the new tax law behind them, your contributors may be looking to structure their charitable giving in new ways. And, although the deductibility of most gifts hasn’t changed, some of the recordkeeping requirements have. Helping your donors understand the requirements and benefits of their gifts will help you strengthen those relationships.
Allowable deductions vary widely
Generally, donors can deduct total contributions of money or property up to 60% of their adjusted gross income. The amount of the allowable deduction varies based on the type of donation. Cash donations are 100% deductible, including donations made by check, credit card or payroll deduction if the donor maintains proof on a bank record or written communication from the recipient.
Donations of ordinary-income property are usually limited to the donor’s tax basis in the property (usually the amount the donor paid for it). Specifically, donors can deduct the property’s fair market value (FMV) less the amount that would be ordinary income or short-term capital gains if they sold the property at FMV.
Property is ordinary-income property when the donor would recognize ordinary income or short-term capital gains if he or she sold it at FMV on the date of donation. Examples include inventory, donor-created works of art, and capital assets (for example, stocks and bonds) held for one year or less.
Fair market value applies in some cases
Donors of capital gains property can usually deduct the property’s fair market value. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But there are certain situations where only the donor’s tax basis of the property may be deducted (assuming it is less than FMV), such as when the donation is intellectual property (for instance, a patent or copyright) or, interestingly, “certain taxidermy property.”
As the name implies, tangible personal property can be seen or touched. Examples include furniture, books, jewelry and paintings. If your nonprofit uses the donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use — for example, a not-for-profit children’s hospital sells the donated painting at its charitable auction — the deduction is limited to the donor’s basis in the property.
For donations of property the substantiation requirements depend on the deductible value. Under $250, a receipt is sufficient; between $250 and $500 the donor must have contemporaneous written acknowledgment; and between $501 and $5,000 the donor must also file Form 8283. Any gifts over $5,000 in value also require a qualified appraisal. The IRS finalized these requirements in 2018.
Vehicle donation limits vary
Generally, if a vehicle has an FMV greater than $500, the donor can deduct the lesser of the gross proceeds from its sale by the organization or the FMV on the donation date. But if the nonprofit uses the vehicle to carry out its tax-exempt purpose — for instance, an animal welfare organization that uses a donated van to transport rescued dogs and cats — the donor can deduct the FMV. Make sure you provide Form 1098-C, which your donor must attach to his or her tax return to take the deduction.
Rules for property donations are complex
Say a supporter donates a one-week stay at his vacation home for an auction. Unfortunately, he can’t take a deduction, because generally only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation contribution.
Donors also might want to claim a deduction for the donation of their services, such as when a hair stylist donates one free haircut and color for your auction, or a graphic designer lays out each issue of your quarterly newsletter for free. These types of donations aren’t deductible as contributions, only as normal costs of doing business. But the related out-of-pocket costs, such as supplies and miles driven for charitable purposes, are deductible as charitable contributions.
Keep donors on board
While tax education may seem beyond your responsibility, you can’t afford disgruntled donors. Taking the time to make sure your donors understand the tax implications of their gifts can avoid unpleasant surprises down the road. And this will help keep donors on board as long-term supporters.