Nonprofit Pledges and Their Tax Deductibility

The process of deconstruction is to carefully dismantle existing structures with the intent of salvaging and reusing materials and fixtures with remaining useful life. These services are an environmentally friendly alternative to demolishing and throwing the contents into the dumpster, and eventually, the landfill.

Many nonprofits offer deconstruction services. They often provide training to individuals with the hopes of teaching skills that will result in long-term employment prospects. These “Workforce Training” programs are funded by nonprofits. Sometimes, nonprofits request from donors, a pledge, or monetary donation, for providing deconstruction services. These pledges must be carefully analyzed for deductibility from a tax perspective.

Nonprofit Monetary Pledges—are They Deductible?

• 1
  If the fees charged for deconstruction services are, in fact, a fee-for-service, these amounts are not tax deductible as a monetary charitable contribution. The IRS requires donations given to nonprofits to be given without expectation of receiving a good or service in return. The donor is receiving the service of having the building or structure removed—most certainly a fee for service and a quid pro quo.
• 2
  The nonprofit can help with financial and tax transparency by dividing the monetary pledge into two components: a fee-for-service and a purely charitable contribution. This transparency is necessary for both the donor and the nonprofit to substantiate the deductibility of any part of the monetary donation.
• 3
  If the nonprofit does not make this necessary breakdown of costs, the donor should contact other companies offering similar services, like demolition and removal, and collect bids on what they would charge to so similar work. They should work with their tax professional to carefully document this process when determining what, if any, of the monetary pledge amount is deductible.
• 4
  Nonprofits who base pledge amounts off of appraised valuations should be highly suspect, in our opinion. The funds needed to run the deconstruction crew coupled with covering the workforce development program is completely independent of the underlying appraised valuation of the assets to be donated.
• 5
  The appraiser’s fees may not be based on a percentage or correlate with the appraised valuation—they must be based on the amount of work to be performed. We posit the same treatment should be given to pledges by nonprofits offering deconstruction services—fees should be based on the amount of work to be performed and the costs to run the workforce training program, not the value of the donation.
• 6
  The situation is ripe for abuse, from both the nonprofit and the appraiser, when pledges are based on appraisal valuations. Nonprofits and appraisers could hypothetically work together to ensure the appraised valuations are high. This makes higher pledge amounts more easily stomached, by the donor, when they believe a higher tax deduction will be realized. Appraiser fees can also slide higher when they promise higher valuations. Again, the donor can better stomach creeping fees when they feel like they are winning the deconstruction tax deduction lottery.

A Final Word on Nonprofit and Appraiser Independence

Nonprofits and appraisers must maintain complete independence from each other. Nonprofits should have absolutely no say as to which appraisers can and cannot be used by a donor when donating to their organization. A nonprofit hypothetically keeping a list of “Approved Appraisers” is professionally and ethically unacceptable. Some good follow-up questions for appraisers and nonprofits include the following:

• 1
  Appraiser—What percentage of appraisal work do you perform for this nonprofit?
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  Conversely, Nonprofit—what percentage of your donations are appraised by this appraiser?

The Green Mission Inc. continues our work of elucidating appraisal and appraiser standards to an industry in need of regulation. The standards have already been written and codified by the IRS, appraisal organizations and case law. Deconstruction, Reuse or whatever-you-want-to-call- yourself appraisers must retain our independence, value using approved methodology to arrive at fair market value, and ensure huge rays of sunlight exist between ourselves, nonprofits and other members of the industry. By doing so, we provide our best service to the circular economy by ensuring donations and reuse continue unabated devoid of irregularities, or as the IRS might put it—tax fraud.