Current tax law allows individuals to deduct the Fair Market Value of non-monetary charitable contributions. Materials salvaged from a building structure as well as personal property donated to a nonprofit 501(c)(3) or government entities like schools, colleges or parks and recreation systems, may qualify to be deducted.
The IRS provides a list for reference in determining if an organization is qualified to receive a charitable contribution: www.IRS.gov/TEOS
Let us take a deeper dive into the IRS codifications to determine if a deduction may be taken based on the tax situation of the individual.
Individuals may claim a tax deduction for non-monetary charitable contributions on their Form 1040 Schedule A “Itemized Deductions.” To take charitable contributions of either a monetary or non-monetary nature, an individual must itemize deductions. With the passage of the Tax Cut and Jobs Act (TCJA), the Standard Deduction has been substantially increased ($24,000—Married, $18,000—Head of Household and $12,000—Single.) This means that an individual’s itemized deductions must exceed the Standard Deduction.
What comprises the form 1040 Schedule A?
- Medical and Dental Expenses : These expenses can only be taken to the extent that they exceed 7.5% of a taxpayer’s Adjusted Gross Income. If Adjusted Gross Income is $100,000, for example, only expenses above $7,500 would be deductible.
- Taxes You Paid : This deduction was gutted by the TCJA. These taxes are commonly referred to as SALT (State and Local Taxes.) This amount has now been capped at $10,000. This means if you paid $8,000 in state income taxes, $8,000 in real estate taxes and $1,000 in car taxes (personal property taxes), your total of $17,000 in SALT taxes is capped at $10,000. The taxpayer permanently loses the $7,000 in deductions.
- Interest You Paid : This deduction is for home mortgage interest. If the mortgage was entered into during 2018 or later, the amount of interest deducted can only be taken for up to $750,000 of the total mortgage amount. Mortgages entered into prior to 2018 are capped at $1 million.
- Gifts to Charity : Monetary contribution limits to qualified organizations have been increased to a limit of 60% of AGI. Non-monetary contributions (like deconstructed materials and personal property) are limited to 50% of AGI. However, in both cases there is a five-year carryforward for any amount not used.
- Casualty and Theft Losses : These are now only allowed for losses from a federally declared disaster area.
- Miscellaneous Itemized Deductions : These were allowed prior to the TCJA implementation and were allowed for various deductions like work-related expenses for w-2 employees subject to a 2% AGI floor. These are now gone.
In dissecting the deductions above, the TCJA has set up charitable contributions as one of few malleable areas left on the Schedule A, setting it up as a great tax planning strategy and tool. This tax planning strategy’s importance is even more pronounced when we examine another provision of the TCJA, which is beneficial to the individual taxpayer—the removal of the Itemized Deduction phase-out. The Itemized Deduction income-based phase-out of certain itemized deduction has been removed until 2025. Prior to the removal of this provision, some Itemized Deductions were subject to limitation if AGI exceeded $313,800 MFJ, $287,650 HOH and $261,500 S. With the removal of this limitation, taxpayers can implement smart donation strategy to maximize tax benefits while helping nonprofits and government entities perform their missions and help those within our communities with the greatest need.
For non-monetary contributions of $5,000 or more, a qualified appraisal is required by a qualified appraiser, per IRS regulations. The taxpayer is generally entitled to deduct the Fair Market Value of the materials or property.
However, sometimes the Fair Market Value may be limited to the “basis” in the property. In tax parlance, basis generally means the capital investment in property for tax purposes.
Typically, the basis of an asset is its cost to you—how much cash, debt obligations, and/or other property or services you paid. However, if the asset has been depreciated by a taxpayer in the course of its business use (for pass-through entities) the donation value is limited to the adjusted basis of the asset. If a taxpayer purchased a refrigerator for $10,000 to use in their commercial kitchen and in year 3, $4,000 has been taken in depreciation. The basis of the asset is now $6,000. If the Fair Market Value is determined to be $7,500, the taxpayer is limited to a charitable contribution deduction of $6,000. Generally, the Fair Market Value of long-term assets can be taken if the one-year holding period is met.
Another important tax consideration pops up for real estate investors vs. real estate dealers donating deconstructed materials and property taken from these assets as pass-through entities. Investors purchase with the purpose of holding and producing a capital gain, hence they are allowed capital gain tax treatment. Dealers purchase with the intent of making frequent or continuous transactions and income is considered ordinary income and capital gain treatment is not available.
In any non-monetary donation scenario, an individual must conference and rely upon the advice of their CPA, tax attorney or tax professional. We can point our clients to the IRS codifications but it is up to their tax professional to determine if the donation is allowable given the individual's unique tax situation.
