Deconstruction - The Sustainable Alternative to Demolition
The IRS permits individuals, pass-through entities and corporations to contribute non-monetary charitable contributions to 501(c)(3) nonprofit organizations and government entities. Individuals and pass-throughs take this donation on their 1040 personal income tax return on the Schedule A “Itemized Deductions.” 1 The deductions are limited to 50% of their AGI with a 5-year carryforward. Corporations take the deduction on their annual filing form 1120 with a limit of 10% of net income (with certain add-backs) and also have a 5-year carryforward.2 For donations with a value in excess of $5,000, a qualified appraisal must be produced by a qualified appraiser.3
Tax incentivization, like the donations permitted through IRS codification, have the potential to produce measurable increases in waste diversion rates. One would hope the opportunity to protect the environment could produce adequate waste diversion yet we have seen first-hand how tax incentives as motivators encourage donation and reuse. The environmental benefits of diverting building materials and property from the dumpster-to-landfill to donation-to-reuse include the following: reducing the carbon load deposited into the ground, the maintenance of clean water supplies from the reduction of landfill deterioration into potable water sources, addressing the imminent closing of landfills due to being filled to capacity (especially in light of China’s refusal to continue purchasing our waste,) and perhaps most importantly, nonprofits and government entities receiving much needed donations of building materials and property to fulfill their missions. However, as we look around the country at the cheap costs of landfill dumping, with a national average landfill tipping fee of $55.11/ton, relying on the environmental altruism of individuals and corporations to affect environmentally responsible choices would be absurdly naïve and ineffectual.4 We need to offer taxpayers the “carrot” of the donation deduction and potential tax savings.
Protecting these “carrots” is critically important. Let us take a deeper dive into the potential pitfalls already besetting the non-monetary donation industry.
Accurately and Conservatively Valuing Donations
The IRS requires a “qualified appraisal” to be completed by a “qualified appraiser.” Upon close inspection of regulations of these appraisers, much is left to be desired. Unlike the fields of CPAs, CFPs, attorneys, real estate appraisers and other financial industries, personal property appraiser qualifications are not as robust nor stringently enforced. These appraiser requirements comply with the Uniform Standards of Professional Appraisal Practice (USPAP.)5 Some of the requirements include:
- 30 semester hours of college-level education (an Associate Degree meets this requirement)
- Each course credited toward the required number of qualifying hours should represent a progression by which the appraiser’s knowledge is increased.
- 120 creditable classroom hours
- Completion of a 15-hour Personal Property USPAP Course
- Completion of a course and successfully passing an examination in valuation theory and principles at a minimum of 45 hours
- 60 credit hours of education covering 12 topics emphasizing the appraisal of personal property
- A Bachelors, Masters or Doctoral degree in valuation theory and/or personal property appraisal from an accredited college or university will fulfill the requirement for valuation theory.
- 70 hours of Continuing Education during each 5 years preceding credential renewal - 20 hours must be in valuation theory
- 700 hours of personal property appraisal experience
- Increased hours for areas of specialization6
Upon perusal of these standards outlined above and in more detail from The Appraisal Foundation, one could conclude standards are adequately rigorous to ensure only individuals with high educational attainment and market-centered training comprise the industry. However, here is what has sometimes been observed in practice:
- Prior to 2018, individuals could be “grandfathered” into the main appraisal organizations including the American Society of Appraisers (ASA,) International Society of Appraisers (ISA,) and Appraisers Association of America (AAA) requiring zero hours of any college-level coursework.
- Appraisers could potentially fabricate the number of hours they have worked within the industry with little oversight.
- More rigorous examinations are needed, similar to the real estate appraisal industry, with strict oversight of testing facilities.
- Examinations including the production of a “qualified appraisal” should be closely proctored to eliminate cheating on this element of examination since it can be accomplished remotely.
- Ethics complaints should be investigated in a timely manner with suspension of credentials found in a searchable online forum.
- The creation of a Personal Property Appraisal license
- Outreach to colleges and university business departments to create Associate, Bachelor and Master’s degrees with either a major or a concentrated area of study in Personal Property Appraisals
- Encouraging the IRS to provide a list of Qualified Appraisers in conjunction with USPAP to allow the public to quickly search and determine if an appraiser’s claimed qualifications can be substantiated as well as information on college courses and degree attainment.
Propensity for Valuation Abuse
Like any financial sector, personal property appraisal production is susceptible to abuses. Per law, an appraiser may not charge appraisal fees based on the value of the appraised property. However, this regulation could be skirted by word-of-mouth throughout the industry, where consumers know to whom they should go to receive inflated appraised values. The IRS is not naïve to these potential abuses and are closely monitoring non-monetary charitable donations on tax returns. We must ensure these tax deductions are protected from unethical practices by appraisers or any other industry players. Appraisal fees must correlate with the work needed for their completion.
In combatting abuses throughout the industry, the appraiser should ensure the nonprofit provides a detailed inventory of every donated item crossing their threshold to the appraiser prior to the final appraisal being submitted to the client. Per law, donors can only claim the value for materials or property actually received by the nonprofit. Secondly, appraisers need to revisit the valuation price-points they use in determining Fair Market Value of materials and property. Real-time price comparisons from second-hand sale of similar materials should be made available and used in determination of value. These price-points could potentially be accessed by implementation of an app-based sales mechanism capturing sales in real-time around the nation. An added benefit would the accessibility of sales data in specific geographic regions as a tool in determining accurate and conservative valuation. Building materials on the resale market will be quite different in New York City than in Rosendale, Wisconsin. This would be in the best interest of the IRS to closely follow any implementation of this type of system. The result will most likely be a reduction in appraisal valuations and an associated decrease in the value of tax deductions when more accuracy and regional real-time sales prices are utilized. Finally, ethical personal property appraisers can and must work within a collegial collaboration relationship to share research and best-practices. Those in the industry committed to these ethical practices are anxious to shore up standards and work together to ensure these critical tax incentive “carrots” remain in force. Nonprofits and government organizations need the continued benefit of donations to further their missions and provide necessities in a nation facing continuous budget cuts and lack of funding. Of utmost importance, our beautiful earth needs to be protected during this era of climate change and pollution wreaking havoc on our forests, oceans, homes and the air we breathe. Our aim at The Green Mission Inc. is to strive for maximum waste diversion through a multi-faceted approach including the protection of federal tax incentives.
Please stay tuned as we tackle other potential waste diversion avenues including local, state and federal deconstruction ordinances and mandates and how we move deconstruction from a rare alternative to a front-line approach ahead of demolition and landfill dumping.
Reference Links:
1 IRS Publication 526 Charitable Contributions
2 IRS Publication 542 Corporations
3 IRS Publication 561 Determining the Value of Donated Property
4 Environmental Research & Education Foundation © 2019
5 https://appraisalfoundation.sharefile.com/share/view/se88e19d655740efb
6 https://appraisalfoundation.sharefile.com/share/view/se88e19d655740efb
