The deductibility of most charitable gifts hasn’t changed since passage of the Tax Cuts and Jobs Act, but some recordkeeping requirements have. Helping your donors who itemize deductions understand the rules and benefits of their gifts can strengthen your not-for-profit’s ties with them — and may help increase contributions.
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, but cash donations are 100% deductible if the donor maintains proof (such as bank records or thank-you letters from your not-for-profit).
Donations of ordinary-income property usually are limited to the donor’s tax basis in the property (usually the purchase price). 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 donors would recognize ordinary income or short-term capital gains if they sold it at FMV on the date of donation.
When FMV Applies
Donors of capital gains property usually can deduct the property’s FMV. 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 in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property may be deducted.
If your not-for-profit uses tangible 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 (a hospital sells the donated painting) the deduction is limited to the donor’s basis in the property.
For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth:
- Less than $250, a receipt is sufficient.
- Between $250 and $500, the donor must have contemporaneous written acknowledgment.
- Between $501 and $5,000, the donor must also file Form 8283.
- More than $5,000, the donor must obtain a qualified appraisal.
In general, 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 can’t claim a deduction for the donation of their professional services. However, related out-of-pocket costs, such as supplies and miles driven, are deductible as charitable contributions.
Look Out for Their Interests
Take time to make sure your donors understand the tax implications of their gifts. It can help them avoid unpleasant surprises down the road — and keep them loyal to your not-for-profit. Contact your trusted advisor with questions.