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Charitable Contributions – Part One: Basic Concepts for Charitable Deductions

Basic Concepts for Charitable DeductionsYour grandmother Phyllis was a remarkable woman. Aside from making it out on the other side of Uncle Bill’s childhood with only moderate shell shock (which, I suppose, is referred to these days as PTSD), Phyllis was an intelligence agent in the United States Army towards the end of World War II, and you could remember her saying that, despite as “intelligent” as she may have been in the Army’s estimation, her good genes weren’t fairly apportioned between and betwixt her children.

Granny Phyllis always questioned by what divine providence did your mother get “at least 98% of those good genes,” with only the remaining 2% passing to Uncle Bill…of which original percentage, you estimate, he currently maintains about two-thirds, having effectively culled out the remaining 33% with grain liquor, psychedelics, and tannery fumes.[1]

TwentiesIn her will, Phyllis left a beautiful old faded green settee to your mother that you remember being next to her dressing table, always strewn with a fascinating menagerie of clothing and remnants of her most interesting life. When she died, your mother took the settee home, but much to her disappointment, the relic of the Roaring Twenties did not fit with her new BOHO-chic aesthetic.

She understands that it is a valuable piece of furniture, but instead of selling it, she would prefer to give it to a museum or historical society that will preserve it and treasure it, like you treasure the memories of sitting on it and listening to Granny Phyllis recount the story of the Easter of 1968 when the monsignor begged her to allow “his people” to perform an exorcism on Bill, when he, having stumbled on an uncommonly large patch of psilocybin mushrooms in Farmer McQuaid’s cow pasture earlier that Easter morning in 1968, proceeded to speak in tongues during morning mass (and for three days hence).

Basic Concepts for Charitable Deductions

Charity DeductionsWithout further ado, let’s explore the most basic concepts for charitable deductions under the Coded.  In general, individuals can deduct charitable contributions made to “qualifying organizations.”[2] In order to take an above-the-line[3] charitable contribution deduction of more than $600,[4] an individual taxpayer must choose to itemize his or her deductions on Schedule A of their federal income tax return (Form 1040).

Even if the taxpayer itemizes his or her deductions, the deduction may be limited if certain rules and limits apply. Generally, individuals itemize their deductions when the sum of the itemized deductions is greater than the standard deduction, which in 2021 is $12,550 (single filers) and $25,100 for married filers filing joint returns.

Organizations That Qualify to Receive Deductible Contributions

Not all donations to organizations calling themselves “charities” will qualify for a charitable deduction. Charitable contributions are gifts to or for the use of the United States, a state, a U.S. possession, or any subdivision thereof (like a city, county, parish, borough, hamlet, town, municipality, and the like).[5] Also, gifts to domestic organizations may be charitable contributions, so long as such organizations are described in IRC § 501(c)(3).[6]

Moira Charity DeductionsIn general, IRC § 501 concerns the exemption of certain entities from the tax on corporations, certain trusts, etc. There are 28 exempt types of entities,[7] but donations to all 28 entities are not necessarily deductible. For this article, we are only concerned with IRC § 501(c)(3), which deals with entities,[8] which generally must be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.[9]

This language in the Code has led to the development of what are now known as the “organizational” and “operational” tests,[10] which an entity must continue to pass to remain an IRC § 501(c)(3) organization. We won’t get into the nitty-gritty of these tests, but you can find a good discussion of the tests in some of our other articles like this one and this one.

Limitations on Deductions

Charities Deductions

For certain very generous individuals, charitable deductions may be limited. Depending on the donee organization, an individual’s deduction for charitable contributions was historically limited to 30%[11] to 50%[12] of the taxpayer’s “contribution base,”[13] which is generally the taxpayer’s adjusted gross income (AGI).[14] AGI, in turn, is the taxpayer’s total gross income,[15] less certain adjustments.[16] Any excess deductions may be carried forward for five years.

So, for a couple who made $125,000 per year in 2015, whose AGI is $100,000, their charitable contribution deductions would have been limited to $30,000 to $50,000 per year. If, for example, the taxpayers gave $75,000 in cash to a charity for orphaned Neapolitan mastiffs, they could deduct $50,000 in 2015, and carry the additional $25,000 deduction forward through their 2020 tax year.

For cash contributions made between January 1, 2018, and December 31, 2026, the limit was 60% of the contribution base. In response to COVID, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act,[17] which expanded this limit even further to 100% of the taxpayer’s AGI (to qualifying organizations other than donor advised funds, supporting organizations, and private foundations).

Congress extended the CARES Act’s 100% AGI limit through the end of 2021 by the Consolidated Appropriations Act (CAA).[18] Non-cash (property) donations do not qualify for the 100% AGI “limit” but are, instead, subject to the historic limits of 30%-50% limitations (or 60% through 2026). There are a number of additional issues regarding non-cash charitable contributions, which we’ll discuss now.

Non-Cash Charitable Contributions

Good Samaritan DeductionsAs noted above, when a taxpayer donates to public organizations such as churches, educational institutions, and hospitals (i.e., “qualified organizations”), the taxpayer’s total charitable deduction (including both cash and non-cash donations) cannot exceed 50% of the taxpayer’s adjusted gross income (AGI). Similarly, when the taxpayer donates to private organizations such as veterans’ groups, fraternal societies, nonprofit cemeteries, and certain private foundations, the maximum deduction cannot exceed 30% of the taxpayer’s AGI.

The amount of the non-cash charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property has increased in value, a taxpayer may have to adjust the amount of the deduction.  Special rules apply to certain contributions like clothing and household items;[19] cars, boats, and airplanes;[20] partial interests in property; property subject to a debt; conservation contributions; future interests in tangible personal property;[21] business inventory; and patents or other intellectual property rights.  Also, if you intend to donate Uncle Irwin’s stuffed jackalope, especially special rules apply.[22]

Valuation and Reporting Rules for Non-Cash Contributions

Stapler DeductionsThe Code and Treasury Regulations contain very specific valuation and reporting rules for non-cash charitable contributions, the complexity of which increases as the donations become larger.[23] It is critical that such rules be followed implicitly, especially the recordkeeping requirements (and even more so for higher-value contributions), as the only thing that the IRS collectively loves more than a good stapler is denying a charitable contribution deduction for want of substantiation.[24]

The rules are not terribly complex, but they are critically important as we have discussed in this article and in these series of posts.

Donut ReceiptThe great, late comedian, Mitch Hedberg once joked about a donut shop giving him a receipt: “C’mon man, we don’t need to bring ink and paper into this. I just can’t imagine a scenario where I would have to prove that I bought a donut.”

Charitable contributions aren’t as simple.  For all noncash contributions, the Treasury Regulations requires a receipt with the name of the charity, the date and location of the donation, and a description of the property that provides sufficient detail to identify it.[25]

If you donate (cash or property) of $250 or more, you and Mitch would need a contemporaneous written acknowledgment (“CWA”) from the organization.[26]  The CWA must contain the amount of cash or description of the property and a statement as to whether the donee organization provided anything (goods or services) in exchange for the contribution (other than “nontangible religious benefit”).[27]

The Tax Court has determined that the lack of a CWA is a “deal breaker,” which is to say that no deduction will be allowed if there is no CWA or if the CWA is incomplete.[28] For donations of property above $250, you must still keep a receipt,[29] and you must maintain written records with a more detailed description of the property, including the manner and approximate date you acquired the property, as well as your basis in the property.[30]  Similar items of property are considered as a group for purposes of determining whether a contribution exceeds the $500 threshold,[31] meaning that if you donated 5 Gucci purses, you’d value them together as one contribution.

For contributions of property in excess of $5,000, in addition to a receipt and written records, you must obtain a “qualified appraisal” of each donated item and attach to each tax return a fully completed appraisal summary on Form 8283.[32] It must provide the physical condition and age of individual items, the qualifications of the appraiser, a statement that each appraisal was prepared for income tax purposes, and the appraised fair market values of individual items donated.[33]

The qualified appraisal must be made no earlier than 60 days before the date of the contribution and no later than the due date of the return.[34] Finally, it must be prepared, signed, and dated by a qualified appraiser.[35] Also, the appraisal must actually be related to the same items donated—not just similar ones.[36]

Takeaways

Lawyers Complicate Deductions
Though often true, this is not always the case…especially when it comes to taxes…

Anytime that you make a charitable donation, you should get a receipt.  If you’re going to make a substantial charitable donation ($250 or more), then you will need to get the charitable recipient more involved.  If you make a donation of property worth $5,000 or more, you will need a qualified, competent appraiser.  The IRS is a stickler for these rules.  It’s best not to test them on it.

Thus, if you are thinking about making a large donation of property of any kind, it would be in your best interests to call a tax attorney or a CPA to make sure that you have all of the proper documentation in place before you actually make the donation.  The stakes (deductions) are very high, and it’s best not to leave these things to chance.

Shoot me an email with any questions, and I’ll be happy to answer them!

Take a look at our next post in this Taxing, Briefly series to learn a bit more about charitable contributions.


Footnotes:

[1] The late Sixties and early Seventies were not kind to Bill, nor, it turns out, were the Eighties. He did an about-face in 1991, but once recreational marijuana was legalized in the state of Maine in November 2016, his days of following Jerry Garcia like a disciple came flooding back to him like a real-time acid flashback. As for acid flashbacks, he has told you at least four times of the time he was hip deep in a rice patty three clicks outside of Ho Chi Minh, with Charlie bearing down hard on his unit, with three rounds left in his M-16 and the smell of napalm hanging thick in the air like Spanish moss hung over the pecans and live oaks where he grew up in North Florida.

You reminded your dear uncle, on just as many occasions, that he was a conscientious objector, whose only foray into the Vietnam conflict was going down to the draft board, sitting on the Group W bench, singing all of the bars of Phil Ochs’ “Draft Dodger Rag” to the sergeant, and claiming that the song was written about him. It should be noted, to Uncle Bill’s credit, that his feet were indeed flat, he had eyes like a bat, and his asthma was getting worse…whether he was allergic to flowers and bugs is anyone’s guess, but the thousand drugs’ bit was pretty darn accurate.

[2] Corporations may also take charitable contribution donations, though they are subject to a lower limit than individuals. Contributions made by a partnership are passed through to the partners under IRC § 703(a), which deductions then flow through to the individual partners and are subject to the partners’ individual limits. For purposes of this article, we will focus on individual deductions.

[3] An above-the-line deduction is a deduction the IRS allows you to subtract from your annual gross income in order to arrive at your “adjusted gross income,” or AGI. It is the AGI on which you are taxed. Above-the-line deductions are beneficial because they reduce your AGI, which reduces the amount of taxes you owe.

[4] For tax years beginning in 2021, cash contributions up to $600 (or $300, if filing separately) can be claimed on Form 1040 or 1040-SR, line 10b. See Consolidated Appropriations Act of 2021. In general, such contributions must be paid in cash (or by check) to qualified organizations other than private foundations. Contributions of noncash property and contributions carried forward from prior years don’t qualify for this deduction. A taxpayer cannot claim the deduction on Form 1040 or 1040-SR, line 10b, and file Schedule A (Form 1040).

[5] IRC § 170(c)(1) (if contributions are made exclusively for public purposes).

[6] Except for those organized and operated for testing for public safety, for whatever reason. See IRC § 170(c)(2).

[7] The list goes to 29, but number 20 (qualified group legal services plans) was permanently removed in 2014. See Pub. L. 113–295, div. A, title II, § 221(a)(19)(B)(iii), Dec. 19, 2014, 128 Stat. 4040.

[8] Corporations, and any community chest, fund, or foundation.

[9] The list of organizations also includes entities organized for testing for public safety, to foster national or international amateur sports competition (but only if no part of its activities involves the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.

[10] The organization will fail the operational test if a private shareholder or individual profits from an IRC § 501(c)(3) organization; if the organization engages in propaganda or lobbying; or if the organization intervenes in a political campaign (on behalf of a specific candidate).

[11] Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks).

[12] The 50 percent limitation applies to (1) all public charities, (2) all private operating foundations, (3) certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2.5 months following the year of receipt, and (4) certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities.

[13] IRC 170(b)(1)(A) (50% limitation); IRC § 170(b)(1)(B) (30% limitation).

[14] Computed without regard to any net operating loss carryback to the taxable year under IRC § 172.

[15] The sum of all the money the taxpayer earned in a year, which may include wages, dividends, capital gains, interest income, royalties, rental income, alimony, and retirement distributions. IRC § 61.

[16] Including deductible trade or business expenses, alimony payments, HSA deductions, 50% of the taxpayer’s self-employment taxes, student loan interest, tuition, and educational fees. IRC § 62. These are the “above-the-line” deductions mentioned in fn. 3, supra.

[17] Pub. L. 116–136 (Mar. 27, 2020).

[18] Pub. L. 116–260 (Dec. 27, 2020).

[19] IRC § 170(f)(16).

[20] IRC § 170(f)(12).

[21] IRC § 170(a)(3).

[22] IRC § 170(f)(15).

[23] See, e.g., IRC § 170(f)(8), (11); Treas. Reg. § 1.170A-13(b).

[24] In the Fall of 1985, a rogue acquisitions clerk, M. Bartleby, by all accounts an otherwise affable young man, made a most unfortunate scrivener’s error on the General Services Administration’ Form GSA-300 (Acquisition Order for Supplies and Services).  When ordering the annual shipment of staplers for the Washington, D.C., Office of IRS Chief Counsel (.72 staplers for every employee having achieved a GS-8 level or higher, .47 for GS-7 or lower—though, history had proven that “Grade 3 clerks” were the most careless with office supplies (and M. Bartleby had prepared a report for his manager to this end)), M. Bartleby entered a code of S4500 rather than S4600.  (Whether he actually wrote a “5” rather than a “6,” or whether the powderkeg was burst by someone in procurement, as M. Bartleby swore to his death, one cannot be sure.)

Nonetheless, on November 14, 1985, when a shipment of standard-issued, black, metal Swingline staplers—as heavy as a housecat, and as reliable as an old friend—was expected to arrive, M. Bartleby made the horrifying, and history-changing, discovery of 144 Red Bostich staplers—a full gross of the most garish, most decidedly non-IRS staplers imaginable—staring at him as he opened each of the 12 boxes that were delivered by the procurement department.

Bartleby was not long for his job in acquisitions. His lack of attention to detail was evident from an early age, when he had used dish soap, rather than dish detergent to run the dishwasher—rendering the kitchen of the modest Craftman-style house in Bloomington, Indiana completely awash in opalescent suds, to the horror of his father, who was an actuary. It was a mark of ignominy that would follow him like Hester Prynne’s scarlet A for the rest of his life.

Nonetheless, the radical staplers had been purchased, the requisition orders had been placed carefully in the inboxes of each employee, whose staplers were to be replaced between 1:00 PM and 4:00 PM that day.  Out of the one hundred and forty-four government employees, from whose plaintive hands, the same number of standard-issued, black, metal Swinglines were wrested, only seven did not protest.  Three of these seven individuals were named Felecia.  One was named Felicia, who would become a legend in her own right years later…

The ensuing Swingline-to-Bostich schism of 1985 still quietly reverberates in the corners of the IRS to this day. The guerilla warfare, cunning stratagems, and downright guile of legends like L. Radcliffe, J. Smith, N. Chauvin, and B. Morris (God rest his soul) will never be forgotten by those felt-pen revolutionaries who fought beside them.  Nowadays, there are very few who were around during the uncertain days of the Swingline embargo, and even fewer who are willing to recall the anger, fear, and palpable tension of such times.

As it goes and has gone since time immemorial, histories are written by the victors, and the stories of the January 16, 1986 “Employee Benefits, Exempt Organizations, and Employment Taxes (EEE) Tea Party” and even of the February 7, 1986, “Treaty of the East Breakroom” (which formalized the stapler détente—to the satisfaction of no one, especially the hardline loyalists) have been filed away in the cabinets of institutional memory, like yellowing TPS reports of yesteryears.

[25] Treas. Reg. § 1.170A-1(b)(1).  If a receipt is impractical (like if you dropped off a garbage bag of clothes to an unmanned Goodwill bin), then the taxpayer must at least keep written records of the items donated.

[26] A written acknowledgment is contemporaneous if obtained by the taxpayer before his return is due (including extensions).

[27] Treas. Reg. § 1.170A-13(f)(2). Though, if intangible religious benefits were provided, the IRS wants to know about those too.  Treas. Reg. § 1.170A-13(f)(2)(iv).  Is the IRS really leaving the door open to taxing salvation?  If you can explain this last bit, email me at scott@brieflytaxing.comHonestly, I’d love to know.

[28] French v. Commissioner, T.C. Memo. 2016-53, *8; Crimi v. Commissioner, T.C. Memo. 2013-51, *92-*93; Durden v. Commissioner, T.C. Memo. 2012-140, *7-*8; Friedman v. Commissioner, T.C. Memo. 2010-45, *14.

[29] Treas. Reg. § 1.170A-13(b)(1).  A taxpayer who lacks a donee receipt is required to keep reliable written records, including (a) the name and address of the done organization to which the contribution was made; (b) the date and location of the contribution; (c) a description of the property in detail reasonable under the circumstances (including the value of the property); and (d) the fair market value of the property at the time the contribution was made, the method used to determine the fair market value, and if the fair market value was determined by appraisal, a copy of the signed report of the appraiser. See Treas. Reg. § 1.170A-13(b)(2)(ii); Van Dusen v. Commissioner, 136 T.C. 515, 532 (2011).

[30] See IRC § 170(f)(11)(B); Treas. Reg. § 1.170A-13(b)(3)(i)(A)-(B)..

[31] IRC § 170(f)(11)(F); Treas. Reg. § 1.170A-13(c)(7)(iii).

[32] See IRC § 170(f)(11)(C); Treas. Reg. § 1.170A-13(c)(2).

[33] See Treas. Reg. § 1.170A-13(c)(3)(ii).

[34] See Treas. Reg. § 1.170A-13(c)(3)(i).

[35] Id. It must also not involve a prohibited appraisal fee, and it must include certain other specified information contained in the regulations.

[36] See Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *8 (concluding that taxpayers did not obtain a “qualified appraisal” of “the contributed property,” because the appraisals obtained were appraisals of the entirety of the corporation’s assets and not of the specific contributed shares); Smith v. Commissioner, T.C. Memo. 2007-368, *47-*48, aff’d, 364 F. App’x 317 (9th Cir. 2009).

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