One of the oldest deductions in the US tax code is the charitable contribution. It has been modified over time and like many deductions it has been abused. The Internal Revenue Code provides specific requirements for recordkeeping and proof of the value of the deduction. The requirements address the deductibility and possible carry-over to a future year is determined by both the types and amounts of those contributions as a percentage of gross income.
In general, all taxpayers are required to maintain records that prove the amount contributed during the year. If a small business owner is set up as a Limited Liability Company (LLC), the LLC is disregarded, and the donation is considered to be from the business owner. Corporations and partnerships may make charitable contributions as a part of deductible expenses. These contributions must be to a charity recognized under federal law.
A cash contribution is defined as any contribution of cash, check or other monetary gift. The taxpayer must maintain records to show to what organization the contribution was made, the date and the amount of the contribution. This can be bank records or a letter from the donee in writing. For cash contributions above $250.00, the taxpayer must obtain a contemporaneous written acknowledgment which must include the following:
- the amount and a description of any property contributed.
- whether the charity provided any goods or services for the contribution.
- A description and good faith estimate of the value of any goods or services referred to (2) above, or if such goods or services consist solely of intangible religious benefits, a statement to that effect.
The requirements differ depending on the amount. If the amount is less than $250, the following information is required:
- the name and address of the donee.
- The date of the contribution.
- A description of the property in enough detail under the circumstances (considering the value of the property).
- In the case of securities, the name of the issuer, the type of security, and whether the securities are publicly traded securities.
- The fair market value of the donation.
If the noncash contribution is between $250 and $500, a contemporaneous acknowledgement as described above is also required.
If the noncash contribution is between $500 and $5,000, IRS Form 8283, (Section A) is required in addition to all the above. This form requires a lot of information and the assistance of a tax professional can be very helpful.
Additionally, if the noncash contribution is over $5,000, the IRS requires the following:
- An appraisal prepared by a qualified appraiser.
- IRS Form 8283 (Section B). A qualified tax professional is essential here.
There are exceptions to this rule for:
- Publicly traded securities.
- Certain intellectual property.
- Qualified vehicle.
- Inventory and property held by the donor primarily for sale in the ordinary course of business.
Limitations on Charitable Contributions
Under current law, an individual taxpayer’s deduction for all donations is limited 60 percent of “contribution base”. Although there are exceptions, in most cases “contribution base” is synonymous with Adjusted Gross Income (AGI). We will follow that convention for simplicity sake. Unless the law is changed, the 60 percent will be reduced to 50 percent in 2025. The 50 percent limitation applies to most, but not all recipients.
A 30 percent limit applies to gifts to qualified organizations that are not on the 50 percent list. These include veteran’s organizations, fraternal societies, nonprofit cemeteries and certain private nonoperating foundations. The limit also applies to gifts “for the use of” any qualified organization. (This can get very complicated. Please contact our office to discuss.)
The 30 percent limitation also applies to donations of capital gains property. This limitation also applies to a long list of gifts.
Amazingly, there a 100 percent limit for Qualified Conservation Contributions (QCC) made in tax years beginning after 2005. This is a very complicated donation and should not be attempted without competent professional advice.
These aren’t the only limitations and those who wish to make significant donations, especially noncash donations should work with a tax professional to capture the deductions.
What to do with the Left-Over Contribution
There is a light at the end of the tunnel. If a taxpayer, having made all deductions possible, has charitable contributions left can carry those over to future years. All limitations apply. The key is excellent records and professional help.
This article serves as an introduction to deducting charitable giving. It is not comprehensive. The bottom line is to keep excellent records and work with a competent tax professional to maximize your deduction and minimize your tax liability.