Charitable Contributions v.8.0 Course Transcript Presented by: TeachUcomp, Inc.

Transcription

1 Charitable Contributions v.8.0 Course Transcript Presented by: TeachUcomp, Inc. Course Introduction Welcome to Charitable Contributions v.8.0, a presentation of TeachUcomp, Inc. This course will examine the federal tax implications related to charitable contributions. This course contains three chapters and nine distinct learning objectives. By the end of this course, you should be able to do all of the following: Identify the five categories of qualified organizations; identify the eight categories of nonqualified organizations; distinguish between deductible and nondeductible contributions; determine the fair market value of donated property that has decreased in value; determine the fair market value of donated property that has increased in value; identify the tax treatment of contributions of capital gain property to qualified organizations; list the percentage limits that apply to various types of charitable contributions; calculate a charitable contribution deduction using Worksheet 2 from IRS Publication 526; and identify reporting and recordkeeping requirements for taxpayers who make charitable contributions. We recommend printing the course transcript and using it to follow along and take notes during the video lessons. When viewing the included PDFs electronically, you can search for key terms and phrases using the keyboard shortcut Control + F. Type in the key terms in the search field and press Enter on your keyboard. Adobe Reader will display the search terms where they appear in the document. We will also be referencing the review questions, which can be accessed and printed through the training interface. We strongly recommend that you complete the review questions independently. The evaluative feedback that is provided tells us why a question was right or wrong and further assists in the retention of the material. We will discuss general topics related to current tax law and explore those topics further using real world examples. In addition, we will specifically reference IRS Publication 526 and IRS Publication 561 as supplemental material. We have provided a copies of these publications for you which can be accessed in the training interface. You may also download them for free at These IRS publications often include tables or charts that must be used to answer specific questions and complete the course. Page 1 of 27

2 You should also be aware that tax law is always changing. TeachUcomp regularly updates its entire library of courses, and we always use the most recent government publications available when updating our material. Even so, it is always a good idea to check the IRS website for recent changes to tax law, future developments, and pending legislation. Once you have completed each of the video lessons and the review, you will be required to take a final exam. Please complete the final exam and submit it to us, using the instructions in the Submittal Form which can also be accessed in the training interface. Now, please select the next video lesson to continue with the rest of the course. CHAPTER 1- INTRODUCTION TO CHARITABLE CONTRIBUTIONS 1.1- Chapter One Learning Objectives and Key Terms In this chapter, we will begin our examination of the tax treatment of charitable contributions. Let s review the learning objectives for Chapter One. By the end of this chapter, you should be able to do all of the following: Identify the five categories of qualified organizations; identify the eight categories of nonqualified organizations; and distinguish between deductible and nondeductible contributions. There are two key terms for this chapter. They are charitable contribution and fair market value. The first key term for Chapter One is charitable contribution. The IRS defines a charitable contribution as a donation or gift to, or for the use of, a qualified organization. Charitable contributions are typically made in the form of money given to a qualified organization; however, a gift of tangible property may also be considered a charitable contribution. The next key term for this chapter is fair market value. As used in this course, the fair market value of property is the price at which property would sell on an open market between a willing buyer and a willing seller. Generally, for the purposes of determining fair market value, the willing buyer and seller must each meet two conditions: Neither party must have a need to buy or sell; and both parties must be reasonably aware of all of the facts related to the situation Qualified Organizations In this lesson, we will take a look at the types of organizations that are considered to be qualified organizations for the purposes of determining deductible charitable contributions. In order for any contribution to an organization to be deductible, the organization must be considered a qualified organization by the IRS. In a broad sense, any qualified organization will fall into one of five categories identified by the Internal Revenue Service in Publication 526. The first category of qualified organizations identified by the IRS includes entities organized or created solely for charitable, religious, scientific, literary, or educational purposes, or for the prevention of cruelty Page 2 of 27

3 to children or animals. In some cases, certain organizations that promote national or international amateur sports competitions may also be considered qualified organizations within this category. This category of qualified organizations includes community chests, corporations, trusts, funds, and foundations. In order to be a qualified organization within this category, an entity must have been organized or created in (or under the laws of) the United States; including any state, the District of Columbia, or a possession of the United States (including Puerto Rico). The second category of qualified organizations identified by the IRS includes war veterans organizations. This category includes veterans posts, auxiliaries, trusts, and foundations. However, in order to be considered a qualified organization within this category, the entity must have been organized within the United States (or any of its possessions, including Puerto Rico). The third category of qualified organizations identified by the IRS includes domestic fraternal orders, societies, and associations. In order to be considered a qualified organization within this category, an entity must operate under the lodge system. An organization will be deemed to be operating on the lodge system if it meets several basic tests: First, the organization must have a supreme governing body. Second, the organization must have subordinate lodges into which members are elected, initiated, or admitted in accordance with the organization s laws, rules, or ritual. Finally, subordinate lodges of the organization must be required by the laws of the organization to hold regular meetings at least once per month in furtherance of the purposes of the organization. The fourth category of qualified organizations identified by the IRS includes nonprofit cemetery companies or corporations. However, only certain types of contributions to these organizations are deductible. We will look at the criteria that determine deductibility in a future lesson. The fifth category of qualified organizations identified by the IRS in Publication 526 includes governmental entities. This category includes the United States, any state of the United States, the District of Columbia, any United States possession (including Puerto Rico), any political subdivision of a state or US possession, or any Native American tribal government. In order to be considered a qualified organization within this category, the entity must perform substantial government functions. Because of income tax treaties with certain other nations, special rules apply to contributions made to qualified organizations in Canada, Mexico, and Israel. Generally, contributions to charities located in any of these three places will only be deductible if the contributing taxpayer also has income from that same location. In other words, a charitable contribution to a qualified organization in Mexico will only be deductible if the taxpayer who made the contribution also receives some type of income from Mexican sources. Additionally, charitable contributions made to organizations in Canada, Mexico and Israel will only be deductible if they meet the other tests for charitable contributions for example, a contribution made to a Canadian organization will only be deductible if it is made to a qualifying organization. Not every donation to a qualified organization will be considered a deductible charitable contribution. In the coming lessons, we will look at IRS rules that determine whether a contribution is deductible, as well Page 3 of 27

4 as rules that determine how much of a contribution may be deducted. However, it is important for taxpayers to understand that no contribution will ever be deductible unless the contribution is made to a qualified organization, as defined by the Internal Revenue Service. Besides religious organizations and governmental entities, most organizations must apply to the IRS in order to become qualified organizations. A taxpayer who is unsure of whether a specific entity is a qualified organization for tax purposes will usually be able to find the answer by asking a representative of the entity. Organizations should know whether or not they are qualified organizations for tax purposes. A taxpayer may also use online tools available at to search for qualified organizations Nonqualified Organizations In this lesson, we ll take a look at organizations and entities that are not considered qualified organizations for the purposes of determining the deductibility of charitable contributions. Many taxpayers mistakenly think that donations to any nonprofit organization are tax-deductible. However, there are several types of entities that are not qualified to receive tax-deductible donations, despite the fact that they are notfor-profit entities. Generally, organizations that are nonqualified to receive tax-deductible contributions fall into one of eight categories. The first category of nonqualified organizations includes certain state bar associations. A contribution to a state bar association will not be deductible if the bar is not a political subdivision of a state. Additionally, contributions to a state bar association are not deductible if the bar has private (as well as public) purposes, such as promoting the professional interests of its members. Finally, a contribution to a state bar association is never deductible if the contribution might be used for private purposes, or if the contribution s use is unrestricted. The second category of organizations which do not qualify to receive tax-deductible contributions includes chambers of commerce, as well as other similar business organizations and leagues. Chambers of commerce are organizations of businesses who advocate on behalf of the community at large while advancing their collective business interests. Currently, there are approximately 3,000 active chambers of commerce in the United States with at least one fulltime staff member; there are also thousands of active chambers of commerce in the US which are strictly volunteer organizations. Most chambers of commerce generally work to ensure future prosperity for local businesses, make communities attractive, and promote communities. However, regardless of mission or purpose, contributions to chambers of commerce are not tax-deductible. The third category of nonqualified organizations includes civic leagues and associations. In general terms, civic leagues are nonprofit neighborhood organizations that work to maintain and improve the quality of life in their respective neighborhoods. Although civic leagues often work on behalf of neighborhood residents in coordination with local governmental agencies, they are not government agencies themselves. Despite the fact that civic leagues are nonprofit organizations, money given to a civic league is not deductible as a charitable contribution. Page 4 of 27

5 The fourth category of organizations which do not qualify to receive tax-deductible contributions includes country clubs and social clubs, whether public or private. Generally, social clubs are either a group of people or the physical location where they meet. Most social clubs are formed around some common interest or activity amongst its members. It is important for taxpayers to understand that, even if a social club is formed around charity work, money given to the club will not be a deductible charitable contribution. The fifth category of organizations which are considered nonqualified for the purposes of determining the deductibility of contributions includes foreign organizations (other than the qualified Canadian, Mexican, and Israeli organizations discussed in lesson 1.2). Unless a tax treaty with a foreign government allows for the deductibility of charitable contributions made outside of the United States, such contributions will not be deductible. In fact, contributions to charities based inside the United States may not be deductible if the contribution is earmarked for foreign use. For example, let s say that a qualified nonprofit organization in California hosted a fundraiser after a natural disaster in Asia. If all of the donations given at the fundraiser are earmarked for overseas relief, the donations may not be deductible; even though the nonprofit organization in California would otherwise be considered a qualified organization. The sixth category of nonqualified organizations includes homeowners associations, or HOAs. A homeowner s association is the governing body of a housing development or complex. HOAs are most common is single-family housing developments, townhouse complexes, and condominium developments. When a person buys a home that is governed by a homeowner s association, he or she automatically becomes a member of that association. Dues (or any other money) paid to a homeowner s association is not deductible as a charitable contribution. The seventh category of organizations which are nonqualified for the purposes of determining deductible charitable contributions includes labor unions. However, although contributions to labor unions are not considered deductible charitable contributions, a union member may be able to deduct union dues as a miscellaneous itemized deduction (subject to limitations) on Schedule A (Form 1040). The eighth category of nonqualified organizations includes political organizations, as well as political candidates. In a broad sense, and as a general rule, donations paid to any organization that attempts to influence public policy are not deductible as charitable contributions, even though many political organizations are nonprofit. Nondeductible contributions include donations made directly to a specific candidate for office, money given to a political action committee, or a financial contribution to a political party Deductible Contributions In this lesson, we ll look at a few general rules related to deductible contributions. In Publication 526, the Internal Revenue Service outlines general rules related to deductible charitable giving. The first such rule generally allows a taxpayer to deduct contributions of money or property that are made to, or for the use of, a qualified organization. Refer to lesson 1.2 in this chapter to find the categories of qualified Page 5 of 27

6 organizations. As defined by the IRS, a contribution will be considered for the use of a qualified organization if the contribution is held in a legally enforceable trust for the qualified organization (or held in some similar legal arrangement). Accordingly, the first factor that must be present in order for a charitable gift to be deductible is that the gift must have been made to a qualified organization. The second factor that must be present in order for a charitable gift to be deductible is that the gift must not be set aside for use by a specific person, even within a qualified organization. For example, let s say that Mary Smith is an elderly patron of the arts in her community. Mary has been making deductible charitable contributions to her local museum, a qualified organization, for more than twenty years. Last year, Mary s grandson graduated from college and got a job managing the museum s educational outreach office. To help ensure her grandson s success in the new position, Mary gave an additional financial gift to the museum, on condition that the gift would be used only by the educational outreach office. Under these circumstances, Mary s most recent gift to the museum would not be deductible, based upon Mary s condition that the gift be used only by her grandson s department. The third rule related to deductible charitable giving involves gifts of property to qualified organizations. This rule generally allows a taxpayer to deduct the fair market value of donated property at the time of the donation. We ll take a closer look at contributions of property, as well as the determination of fair market value for donated real property, in future lessons. The fourth general rule related to deductible charitable giving imposes limits on deductions for charitable contributions. In most cases, the deduction for charitable giving cannot be more than 50% of a taxpayer s adjusted gross income for a given tax year. In certain cases, smaller percentage limits apply. Additionally, the total of a taxpayer s charitable contributions deduction, when combined with certain other itemized deductions, may be subject to limits. We will take a closer look at deduction limits in Chapter Three Nondeductible Contributions In this lesson, we ll take a look at categories of nondeductible charitable giving. In Publication 526, the Internal Revenue Service outlines nine types of contributions that are not deductible as charitable contributions. In a broad sense, any contribution that is not deductible will fall into one of the following nine categories. The first category of gifts that are not deductible as charitable contributions includes gifts made to specific individuals. This includes any of the following: Contributions made to fraternal societies for the purpose of paying a member s medical or burial expenses; payments to a member of the clergy that can be spent as the clergy wishes; gifts or expenses paid on behalf of a person who provided services to a qualified organization; or donations to needy or destitute individuals. Where needy individuals are concerned, a gift will not be deductible if it is given to a specific individual in need. However, a gift may be deductible if given to a qualified organization that helps needy people. For example, let s say there was a flood in Mary Smith s community. If Mary donated money directly to a family that was affected, her gift would not be deductible. By contrast, if Mary donated money to a relief agency in the area that was a qualified Page 6 of 27

7 organization, the gift would be deductible. However, if Mary requested that her gift to the relief agency be earmarked as aid to a particular individual or family in the area, the gift would become nondeductible. The second category of gifts that are not deductible as charitable contributions includes contributions made to nonqualified organizations. Refer to lesson 1.3 in this chapter to see the categories of nonqualified organizations. Nonqualified organizations include certain state bar associations, homeowners associations, chambers of commerce, social clubs, civic leagues, political organizations, and other entities. Gifts made to nonqualified organizations will never be deductible as charitable contributions. The third category of gifts that are not deductible as charitable contributions includes contributions (or parts of contributions) from which a taxpayer receives (or expects to receive) some benefit. A taxpayer can never deduct the part of a contribution that represents the value of the benefit received by the taxpayer. Examples of these types of contributions include gifts made for lobbying, including amounts earmarked for use in influencing specific legislation; contributions to a retirement home for admittance, room, board, larger accommodations, or maintenance; money used to play games of chance such as raffles, bingo, or lotteries (even if the proceeds benefit a qualified organization); dues paid to fraternal orders; money paid as tuition, or instead of tuition, regardless of whether the payment is designated as a donation; and contributions connected with split-dollar insurance arrangements. However, certain benefits of making a charitable contribution may be ignored by a taxpayer. For example, if Mary Smith makes a $250 donation to a cancer charity, and the charity sends Mary a small cancer awareness pin as a thank-you gift, Mary s donation amount will still be $250. The receipt of any de minimus gift, such as a bumper sticker or a keychain worth only a few dollars, will not impact the amount of a donor s contribution for tax purposes. The fourth category of gifts that are not deductible as charitable contributions includes the value of a taxpayer s time or services. This is true even if a taxpayer spends substantial time volunteering service for a qualified organization. Gifts of time or service are never deductible, even if the time or service would normally be of great value. For example, let s say that Mary Smith is a globally-recognized neurosurgeon. If Mary donates her time to perform a ten-hour operation on a needy child, the value of her donated time will not be deductible. However, if Mary incurs out-of-pocket expenses related to providing the service, those expenses may be deductible. We ll take a look at deductible expenses related to giving services in the next lesson. The fifth category of gifts that are not deductible as charitable contributions includes personal expenses incurred by a taxpayer. A taxpayer may not deduct personal, living, or family expenses as charitable contributions. This category includes the cost of meals eaten by a taxpayer while performing volunteer services to qualified organizations, as well as expenses related to adoption. However, although adoption expenses are not deductible as charitable contributions, a taxpayer may be able to claim a tax credit for adoption expenses. See IRS Publication 501 for more information. Page 7 of 27

8 The sixth category of contributions that are not deductible as charitable contributions includes qualified charitable distributions from individual retirement arrangements, commonly known as IRAs. Qualified charitable distributions, or QCDs, are distributions made directly by the trustees of certain taxpayers IRAs to certain qualified organizations. See IRS Publication 590B for more information. The seventh category of payments that are not deductible as charitable contributions includes appraisal fees, even if the fees are paid in order to determine the fair market value of donated property. However, a taxpayer may be able to claim appraisal fees as a miscellaneous itemized deduction on Schedule A (Form 1040), subject to the 2%-of-adjusted-gross-income limit. See IRS Publication 529 for more information. The eighth category of contributions that are not deductible as charitable contributions includes certain contributions to donor-advised funds. In a broad sense, donor-advised funds are accounts in which a donor may advise the fund on how to distribute or invest amounts held within the fund. A contribution to a donor-advised fund will not be deductible if the qualified organization that sponsors the fund is a war veterans organization, a fraternal society, or a nonprofit cemetery company. Additionally, a taxpayer will not be able to deduct a contribution to a donor-advised fund unless he or she has an acknowledgment from the sponsoring organization that the organization has exclusive legal control over all assets contributed. Other circumstances or factors may also make a contribution to a donor-advised fund nondeductible. For more information, see Internal Revenue Code section 170(f)(18). The ninth category of contributions that are not deductible as charitable contributions includes certain contributions of partial interests in property. In a broad sense, a taxpayer may not deduct a contribution of less than his or her entire interest in property. We ll take a closer look at the rules related to contributions of property in a future lesson Deductible Expenses Related to Giving Services In this lesson, we ll look at deductible expenses that a taxpayer may incur during the provision of volunteer services to qualified organizations. Although a taxpayer is not permitted to take the value of his or her time as a volunteer as a tax deduction, some amounts paid by a taxpayer in connection with giving services to a qualified organization may be deductible. In order to be deductible, such an expense must meet four tests. First, the expense must be unreimbursed. In other words, the taxpayer must be out of pocket for the expense. Second, the expense must be directly connected with providing service as a volunteer. Third, the expense must only have been incurred because of the taxpayer s volunteer service. Finally, the expense must not be a personal expense, or a living expense, or a family expense. In Publication 526, the Internal Revenue Service provides several examples of expenses that would be considered deductible expenses related to giving services. One such example provides for the deductibility of expenses paid to allow underprivileged youths to attend movies, dinners, or athletic events. However, in order for these types of expenses to be deductible, the youths must be selected by a qualified charitable organization whose goal is to reduce juvenile delinquency or crime. Where these types of expenses are concerned, only costs paid on behalf of the underprivileged youth (or youths) are deductible. For example, Page 8 of 27

9 let s say that Mary Smith accompanies three underprivileged youths (who were chosen by a local qualified organization working to reduce gang activity) for a night out. Mary first takes the kids to a basketball game, and then she takes them for pizza. The tickets to the basketball game cost Mary $10 each, and she spent $40 at the pizza place. At the end of the evening, Mary has spent a total of $80. However, Mary may not consider money she spent on her own basketball ticket or her own meal as part of her out-of-pocket expenses. Therefore, the amount Mary s deductible expenses related to providing volunteer services that evening would be $60, not $80. Another example given by Publication 526 relates to conventions. In cases where a qualified organization selects a taxpayer to attend a convention or conference as its representative, the taxpayer may deduct any unreimbursed expenses for travel, meals, and lodging, while away from home overnight for the convention. However, certain out-of-pocket expenses related to attending conventions are not deductible, including personal expenses for sightseeing expeditions, theater tickets, or other such costs. A taxpayer is also not permitted to deduct travel expenses if his or her spouse or children travel to the convention. If a taxpayer attends a church convention as a member of his or her church, rather than as a chosen representative of the church, expenses will not be deductible. A taxpayer may also deduct the expenses related to uniforms that must be worn while providing services as a volunteer. Deductible expenses related to uniforms include both the cost of uniforms, as well as the upkeep of uniforms. In order for uniform expenses to be deductible, two tests must be met: First, the taxpayer must be required to wear the uniform while volunteering for a qualified organization. Second, the uniform must not be suitable for everyday wear. A taxpayer may also incur car expenses while providing services to a qualified organization. These expenses, such as the cost of gas and oil, may be deductible as charitable contributions, provided that the expenses were incurred directly as a result of the taxpayer using his or her car while giving services to a charitable organization. A taxpayer may deduct actual expenses, or use a standard mileage rate of 14 cents per mile driven to calculate the contribution. Parking fees and tolls are also deductible if they are incurred during the provision of volunteer services to a qualified organization. Certain car-related expenses are never deductible as charitable contributions, including repair and maintenance expenses, registration fees, insurance costs, and depreciation. The examples of deductible out-of-pocket expenses given in Publication 526 are not meant to be allinclusive. If a taxpayer incurs costs during the provision of volunteer services to a qualified organization, reasonable out-of-pocket expenses related to the service will usually be deductible as charitable contributions Deductible Student Expenses In this lesson, we ll take a look at student expenses that may be deductible as charitable contributions. A taxpayer may be able to deduct a portion of expenses that are incurred as a result of a student living with him or her in what is often referred to as an exchange student program. Although most exchange student Page 9 of 27

10 programs involve foreign students, domestic exchange programs may also be included for the purposes of determining charitable contributions. However, in order for student expenses to be deductible, three tests must be met. The first test that a taxpayer must meet in order to deduct student expenses as charitable contributions relates to the residency of the student. In order for student expenses to be deductible, a student must live in a taxpayer s home under a written agreement between the taxpayer and a qualified organization seeking to provide educational opportunities to the student. For the purposes of this rule, there are only three categories of organizations: Community chests, corporations, trusts, funds, or foundations; war veterans organizations; and domestic fraternal societies that operate under the lodge system. For the purposes of this rule, the categories including certain nonprofit cemetery companies and government entities are excluded. In other words, when determining whether an entity is a qualified organization for the purposes of deducting student expenses, some entities that are typically considered qualified organizations may not be considered. Refer to lesson 1.2 to review the categories of qualified organizations. If an organization that sponsors exchange students falls into either of the final two categories of qualified organizations found in lesson 1.2, expenses will not be deductible. For example, if Mary Smith hosts a domestic exchange student in her home under a program sponsored by the federal government, her expenses related to participating in the program will not be deductible. The second test that must be met in order for student expenses to be deductible relates to the relationship between the taxpayer and the student living in the taxpayer s home. This rule provides that, if the student is either the taxpayer s relative or the taxpayer s dependent, expenses will not be deductible. In other words, student expenses will only be deductible if the exchange student is neither a relative nor a dependent of the hosting taxpayer. For the purposes of this rule, a relative includes a taxpayer s child, stepchild, foster child, legally adopted child, grandchild, sibling, half-sibling, step-sibling, parent, stepparent, grandparent step-grandparent, aunt, uncle, niece, nephew, or any direct in-law of the taxpayer. For the purposes of this same rule, a dependent includes any person that the taxpayer can claim as a dependent, as well as certain other individuals that the taxpayer could have claimed as dependents. It is important to note that, for the purposes of this rule, foster children and legally adopted children are not considered to be participating in an exchange student-type program for tax purposes. As such, expenses incurred as a result of having foster children and adopted children will not be deductible as charitable contributions. However, taxpayers with foster children or adopted children may be able to seek tax relief in other ways. The third test that must be met in order for student expenses to be deductible as charitable contributions outlines educational requirements for an exchange student who is living with a taxpayer. The student must be a fulltime student at a school in the United States; the student must also be in grades K-12. In other words, expenses incurred for exchange students enrolled in college (or some other secondary educational institution) will not be deductible. Likewise, expenses incurred for exchange students who are only enrolled in school part-time will not be deductible. Page 10 of 27

11 As a general rule, a taxpayer whose expenses meet the three aforementioned tests may deduct up to $50 per month for each full calendar month that a student lives in his or her home. If all three tests are met for fifteen or more days, the period of time may be considered a full month. For example, let s say that Mary Smith took in an exchange student on January 1 st, and the student lived with Mary until May 20 th. As long as all three conditions mandated by the IRS are met for the duration of the student s stay, Mary s deduction will be $250, even though the student did not remain in Mary s home for the entire month of May Contributions of Tangible Property In this lesson, we ll introduce general concepts related to making contributions of tangible property to qualified organizations. When a taxpayer makes a gift of property to a qualified organization, it is necessary for the taxpayer to determine the value of the property given. As a general rule, the Internal Revenue Service allows a taxpayer to consider the amount of a charitable contribution to be the fair market value (or FMV) of the property. In a broad sense, the fair market value of any property is the price at which the property would change hands between a willing buyer and a willing seller, as long as both parties knew all of the relevant facts and circumstances. In some cases, determining the fair market value of property is largely straightforward. For example, the availability of commonly-accepted resources such as the Kelley Blue Book gives taxpayers the ability to independently determine the approximate value of motor vehicles. In other situations, professional appraisers are used to determine the fair market value of property. Although a taxpayer s contribution of property to a qualified organization is usually calculated (for tax purposes) as the fair market value of the property at the time the contribution is made, special tax rules apply when a person contributes certain types of property to a qualified organization, including all of the following: Clothing and/or household items; motor vehicles (including cars, boats, and airplanes); taxidermy property; property which is subject to a debt; a partial interest in property; a fractional interest in tangible personal property; a future interest in tangible personal property; a qualified conservation contribution; inventory from a taxpayer s business; or intellectual property (such as a patent). Over the next several lessons, we ll look at some of the special rules that apply when a taxpayer donates clothing, household items, taxidermy property, or vehicles to a qualified organization; as well as taking a look at special situations where a taxpayer donates a partial (or fractional) interest in property. In the next chapter, we ll examine the ways in which a taxpayer may determine the fair market value of donated property by examining IRS Publication Special Rules for Clothing, Household Items, and Taxidermy Property In this lesson, we ll take a look at the special tax rules that apply when a taxpayer contributes property of clothing, household items, or taxidermy property to a qualified organization. Although a taxpayer may generally deduct the fair market value of property donated to a qualified organization, certain types of donated property are subject to specific rules. Page 11 of 27

12 The first rule related to donating clothing and/or household items to a qualified organization prohibits a taxpayer for taking a deduction for any donated household items or clothing that are in less than good used condition. In other words, donated household items and clothing must be in at least good used condition, or they will not qualify for a charitable contribution deduction. However, an exception to this rule does allow a taxpayer to take a deduction for a contribution of a household item (or an item of clothing) that is not in good used condition if the following two conditions are met: First, the taxpayer must deduct at least $500 for the item. Second, the taxpayer must include a qualified appraisal of the item with his or her tax return. As defined by the IRS for the purposes of determining charitable contributions, the phrase household items includes all of the following: Furniture and furnishings; electronic devices; appliances; household linens; and other similar items. For the purposes of determining charitable contributions, household items do not include any of the following: Food; paintings, antiques, and other art objects; jewelry and gems; and collections. Of course, the classification of certain items will be subject to judgment. For example, a six-foot tall carved wooden bear might typically be considered as an art object. However, if the bear is regularly used as a coat rack in a home, it may be considered as a furnishing. A taxpayer s deduction for a charitable contribution after donating taxidermy property to a qualified organization will generally be limited to either his or her basis in the property, or the fair market value of the property at the time of the donation, whichever is less. This rule applies regardless of whether the taxpayer performed the preparation of the taxidermy property (stuffing, mounting, and so forth); or if some other person was paid by the taxpayer for the preparation of the taxidermy property. As defined by the IRS, taxidermy property is the reproduction or preservation of an animal, in whole or in part. To be considered taxidermy property, an object must meet two tests: First, the property must be prepared, stuffed, or mounted to recreate ore or more characteristics of any animal. Second, the property must contain a part of the body of a dead animal. For the purposes of determining the deduction for a charitable contribution, a taxpayer s basis in taxidermy property includes only the cost of preparing, stuffing, and mounting the property. The taxpayer s basis does not include any transportation or travel costs associated with preparing taxidermy property. A taxpayer may never include in his or her basis of taxidermy property any of the costs of hunting or killing an animal, such as the cost of equipment, travel, or the value of the taxpayer s time Vehicle Donations In this lesson, we ll take a look at the special rules that apply to the contribution of a qualified vehicle. As defined by the IRS, a qualified vehicle falls into one of three categories: First, a qualified vehicle is a car or any other motor vehicle manufactured mainly for use on public roads, streets, and highways. Second, a qualified vehicle can be a boat. Finally, a qualified vehicle can be an airplane. If a taxpayer donates a qualified vehicle to a qualifying organization and the fair market value of the vehicle is more than $500, the taxpayer s deduction will be the smaller of either the gross proceeds from Page 12 of 27

13 the sale of the vehicle by the organization; or the vehicle s fair market value on the date of the donation. The best way to determine the fair market value of the vehicle on the date of contribution is to consult a reputable source, such as the Kelley Blue Book. There are two exceptions to this rule. First, if the qualified organization makes a significant intervening use of or material improvement to the vehicle before transferring it, the fair market value at the time of the contribution should generally be used. Second, if the vehicle is sold by the organization well below fair market value, the fair market value at the time of the contribution can still be used, provided that the vehicle was not sold at auction. If the deduction of a qualified vehicle is $500 or less, the deduction is the smaller of either $500 or the vehicle s fair market value on the date of contribution. After a taxpayer donates a qualified vehicle to a qualifying organization, the organization becomes responsible for issuing a Form 1098-C Contributions of Motor Vehicles, Boats and Airplanes to the taxpayer. Form 1098-C displays the gross proceeds from the sale of the vehicle, which will assist the taxpayer in calculating his or her correct deduction. A qualifying organization must provide a taxpayer with the form within thirty days of the sale of a donated vehicle. Form 1098-C must be attached to a taxpayer s return. If the taxpayer files a return electronically, the form may be either attached to the return as a PDF, or mailed separately to the IRS after the return has been electronically filed. If a taxpayer does not provide Form 1098-C to the IRS, a deduction for the contribution of the vehicle will not be allowed. It should be noted that these vehicle donations rules do not apply to donations of inventory, such as when a car dealer donates cars that had been held for sale to customers. In those types of situations, the rules for donations of inventory apply Special Situations Related to Property Contributions In this lesson, we ll look at special situations related to property donations, such as when a taxpayer donates a partial or fractional interest in property; or when a taxpayer donates property that is subject to a debt to a qualified organization. In a broad sense, a taxpayer is not permitted to deduct, as a charitable contribution, any gift of less than his or her entire interest in a property. In other words, if Mary Smith owns 20% of a property, she will not generally be permitted to take a charitable contribution deduction after donating half of her interest in (or 10% of) the property. In order to take a charitable contribution deduction, Mary must donate her entire 20% interest in the property to a qualified organization. Let s look at another example. Let s say that Mary owns a motel with twenty rooms. Two of the rooms are permanently reserved for the use of a qualified organization that provides aid to homeless people. Mary does not charge the organization any fee for use of the rooms. Mary cannot claim a charitable contribution deduction for her contribution of use of the rooms, because she maintains use of the other eighteen rooms. However, the Internal Revenue Code does provide a few exceptions to this general rule. A taxpayer may be permitted to take a charitable contribution deduction after donating a partial interest in property if Page 13 of 27

14 the interest represents one of the following four items: First, a taxpayer may claim a charitable contribution deduction if he or she donates a remainder interest in the taxpayer s personal home or farm. As defined by the IRS, a remainder interest in a property is one that passes to a beneficiary after the end of a taxpayer s earlier interest in a property; for example, upon the taxpayer s death. Second, a taxpayer may claim a charitable contribution deduction if he or she donates an undivided part of his or her entire interest in property; however, the contribution must consist of a part of every substantial interest (or right) of the taxpayer in the property, and must last as long as the taxpayer s interest in the property lasts. Third, a taxpayer may claim a charitable contribution deduction if he or she donates a partial interest in property that would otherwise be deductible, if transferred to certain types of trusts. Finally, a taxpayer may claim a charitable contribution deduction if he or she makes a qualified conservation contribution. We ll take a closer look at qualified conservation contributions in the next lesson. A fractional interest in property, as defined by the IRS, is an undivided portion of a taxpayer s entire interest in a property. Let s look back our example of Mary Smith and her motel with twenty rooms. If Mary donated use of all of the motel s rooms to a qualified organization for one month out of the year, she would be contributing a fractional interest in property to the organization. If a taxpayer contributes a fractional interest in tangible personal property to a qualified organization, he or she will generally not be able to deduct the contribution unless all interest in the property was held, immediately before the contribution, by either the taxpayer or the taxpayer and the qualified organization receiving the contribution. In cases where a taxpayer is able to take a charitable contribution deduction after donating a fractional interest in tangible personal property, the deduction may be subject to recapture under certain circumstances. A taxpayer must recapture the deduction by including the deduction amount in his or her income if both of the following are true: The taxpayer contributed the fractional interest in tangible personal property after August 17, 2006, and the taxpayer did not contribute the rest of his or her interests in the property to the original recipient (or another qualified organization) before the end of certain time deadlines. A recapture of the deduction will also be required if the qualified organization has not taken substantial physical possession of the property, and used it in a way related to the organization s purpose, by the end of certain time periods. In cases where a taxpayer must recapture his or her deduction for a charitable contribution of a fractional interest in tangible personal property, he or she must also pay interest, as well as an additional 10% tax, on the amount recaptured. See Publication 526 for more information. When a taxpayer contributes property that is subject to a debt (such as a mortgage) to a qualified organization, he or she must reduce the fair market value of the property by any allowable deduction for interest paid by the taxpayer (or that the taxpayer will pay in the future) which is attributable to any period after the contribution. Additionally, if the property is a bond, the taxpayer must reduce the fair market value of the property by the lessor of any allowable deduction for interest paid by the taxpayer to buy or carry the bond attributable to any period before the contribution, or the interest receivable on the bond Page 14 of 27

15 (including bond discount) that is attributable to any period before the contribution (and that is not includable in the taxpayer s income, due to his or her established accounting method). The tax rules related to charitable contributions of property subject to a debt are designed to prevent a taxpayer from taking a so-called double deduction, whereby the same amount is deducted as both investment interest and a charitable contribution. In cases where the qualified organization receiving the property assumes the debt, different rules mandate that the taxpayer reduce the fair market value of the property by the amount of the outstanding debt assumed by the organization. Additionally, for the purposes of calculating a taxpayer s taxable gain, the amount of the debt is also treated as an amount realized on the sale or exchange of property Qualified Conservation Contributions In this lesson, we ll look at the tax rules related to qualified conservation contributions. As defined by the IRS, a qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization, to be used only for conservation purposes. For the purposes of these rules, a qualified organization must fall into one of three categories: Governmental units; publicly-supported charities; and organizations controlled by (and operated for the exclusive benefit of) a governmental unit or publicly-supported charity. Additionally, qualified organizations must have both a commitment to protect the conservation purposes of donations, and the resources to enforce restrictions. For the purposes of the tax rules relating to qualified conservation contributions, a qualified real property interest is any of the following interests in real property: A taxpayer s entire interest in real estate other than a mineral interest (including subsurface oil, gas, other minerals, and rights of access to the minerals); a taxpayer s remainder interest in real property; or a restriction (granted in perpetuity) on the use that may be made of the real property. In order for a qualified conservation contribution to be deductible, the contribution must be made for one of four specific conservation purposes: To preserve land areas for outdoor recreation by, or for the education of, the general public; to protect a relatively natural habitat of fish, wildlife, or plants (or some similar ecosystem); to preserve open space (including farmland and forest land), if the preservation yields a significant public benefit; or to preserve a historically important land area (or a certified historic structure). In cases where a taxpayer contributes a qualified real property interest that is an easement (or other restriction) on the exterior of a certified historic structure in a registered historic district to a qualified organization, the contribution will only be deductible if it meets two tests. First, the restriction must preserve the entire exterior of the building (including the building s front, sides, rear, and height) and must prohibit any change to the exterior of the building that would be inconsistent with its historical character. Second, the taxpayer and the organization receiving the contribution must enter into a written agreement. The agreement must certify, under penalty of perjury, that the organization is a qualified organization with a purpose of environmental protection, open space preservation, land conservation, or Page 15 of 27