In the middle of this busy holiday season, you may panic when you suddenly remember that you meant to make some charitable donations before the end of the year.
Rest assured, there is still time to help lower your tax liability and help support one of our local non-profits at the same time.
Both business owners and individuals often use charitable contributions to reduce their total income in order to pay less in taxes. Before you make any donations, there are a few tips that can help you optimize both cash and non-cash contributions. Be sure to keep accurate records for all cash and non-cash donations. For individuals, charitable contributions are an itemized deduction that are reported on Schedule A attached to your tax return.
Cash donations
If you make a cash contribution to a qualified charitable organization worth $250 or more, strict substantiation requirements apply. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution with a written receipt from the charitable organization. The written receipt must contain specific information regarding your contribution, including the amount of the cash donated, a statement of whether the organization provided any goods or services in return for the contribution, and if so, must give a good-faith estimate of the value of the goods or services you received. You must have the receipt in hand when you file your return (or by the due date, if earlier) or you won’t be able to claim the deduction.
There are income limitations regarding charitable deductions for both individual and corporate taxpayers. Individual taxpayers may generally deduct cash contributions up to 50 percent of their adjusted gross income (AGI). There may also be limitations on your overall itemized deductions if your AGI exceeds certain limits. Corporations may only deduct charitable contributions up to 10 percent of the corporation’s taxable income for the tax year.
Non-cash charitable donations
Tax-related complications generally do not present themselves when cash gifts are made to a charity other than possible documentation and proof of the donation.
However, difficulties can and do arise when you make a gift of property. Common items that may be donated to charity as a tax deduction include inventory, equipment, furniture, vehicles, clothing/uniforms, stocks or even artwork. These non-cash items are a bit more complicated to account for on your tax return.
Many companies find they have items to donate when they go through an expansion, a move or a change in product lines, equipment upgrade or fleet vehicles. These transition periods may provide opportunities to donate items to local charities. The amount of deduction you may claim depends on the type of property you are donating.
You may consider adding property donations this year as an alternative to cash, so long as you understand the Internal Revenue Service’s (IRS) definitions and guidelines on these donations.
When you have property items for donation, consider the following before giving property contribution deduction(s) of $500 or more:
How the property was acquired.
The acquisition and donation dates of the property.
The cost or other basis of the property.
If the property is ordinary or capital gain property.
Fair market value of the property.
Detailed description of the items donated.
Written and signed receipt from the charity.
IRS form 8283 must be prepared and attached to return.
Special percentage limitations (20 percent, 30 percent, 50 percent).
Taxable income limitations for C corporations.
If the property contribution deduction(s) is $5,000 or more, the following items must also be considered in addition to the items listed above:
A qualified appraisal made no more than 60 days before the appraised property’s contribution.
An appraisal summary may be required as an attachment to the return depending on the amount of the deduction.
Property exceptions where an appraisal is not required.
The IRS closely scrutinizes non-cash charitable contribution deductions. Without proper documentation to substantiate the donation, it cannot be taken as a deduction. If the IRS audits your tax return and finds that documentation is lacking, they could disallow the property deduction and assess penalties and interest.
Contributions of property to charities are a bit more complicated than run-of-the-mill cash contributions. If you have any questions about a contemplated contribution of property, please do not hesitate to contact your CPA in order to maximize the tax benefits of your generosity.
Dec. 31 is around the corner! Finding tax savings as well as giving to the community we all care about is a win-win for everyone.
Lisa Cross, CPA, is a shareholder at Piercy Bowler Taylor & Kern CPAs located at 200 S. Virginia St., Suite 655 in Reno. She can be reached at lcross@pbtk.com.
