The Tax Cuts and Jobs Act of 2017 and subsequent tax acts, such as the CARES Act, have complicated charitable giving and estate planning. This two-part article provides an overview of the current state of the law as it concerns both. In this first part, the author focuses on charitable deductions.
A charitable contribution deduction is allowable for a contribution actually paid in cash or other property before the close of the tax year (regardless of whether the taxpayer is on the cash or accrual method of accounting) and made for the use of:
Prior to the 2020 income tax year and in general, most charitable contributions made to qualified charitable organizations are deductible up to a limit of 60% of Adjusted Gross Income (AGI). Contributions of appreciated capital gain property valued at fair market value (FMV) and without reduction for appreciation over cost basis are deductible up to a limit to 30% of AGI. Contributions to qualifying Private Foundations are deductible up to a limit of 20% of AGI. (Private Foundations generally have a single source of funding from one family or corporation and most have as their primary activity the making of grants to other charitable organizations and/or to individuals, rather than the operation of charitable programs.)
The March 27, 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act radically changed the modified AGI limitations on “cash charitable contributions” for individual taxpayers for 2020, by raising them to 100% of AGI for individuals.
For “cash charitable contributions” paid to charitable organizations in calendar year 2020, individual taxpayers who itemize their deductions may elect to claim a charitable income tax deduction up to 100% AGI, computed without any net operating loss (NOL) carried over to the taxable year. Taxpayers may decide, however, not to make the election and continue to use the traditional provisions and carry forward contributions deduction into a future year where the value of the deduction may be larger because it can be claimed against income subject to anticipated higher federal income tax rates.
The CARES Act “cash charitable contributions” provision applies to charitable contributions made by partnerships and S corporations where the charitable contribution is then allocated to and reported to the member/shareholder individual taxpayers on their respective forms K-1.
The CARES Act “cash charitable contributions” provision does not apply to contributions to a supporting organization, a donor advised fund, or non-operating Private Foundations.
Contributions in excess of a taxpayer’s AGI are carried over for five years and subject to the 60% AGI limitation on cash contributions in the ensuing carryover years.
Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year was limited to 10% of corporate taxable income (as determined with several modifications for these purposes) with a five-year carry forward for any excess. The CARES Act raised that limit to 25% of taxable income for corporations.
The CARES act also increases the food contribution limits to 25%.
Taxpayers who do not itemize can take an above-the-line charitable deduction of up to $300 in 2020.
Contributions to a qualified charitable organization listed at the Internal Revenue Service (IRS) web site, http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check, made by cash, check, credit/debit card or payroll deductions, are deductible as long as they are substantiated. Donations under $250 must be supported by a canceled check, credit card receipt or a written communication from the qualified charitable organization; donations of $250 or more must be substantiated in a writing by the qualified charitable organization; donations of $5,000 or more generally require a written appraisal.
There are four strictly enforced requirements for proof of a cash donation over $250:
As noted above, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, a qualified appraisal made by a qualified appraiser is required by the IRS and Section B of Form 8283 (Rev. November 2019) must be completed and attached to the donor/taxpayer’s tax return.
The phrase “similar items” means property of the same generic category or type, whether or not donated to the same donee, e.g., automobiles, boats, aircraft, collections, jewelry and gems, real estate, business interests, art works, non-publicly traded securities, land, buildings, etc. The IRS provides this guidance: if the donor/taxpayer give books to three schools and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. The donor/taxpayer must get a qualified appraisal of the books and for each school they must attach a fully completed Section B of Form 8283 (Rev. November 2019) to their tax return.
According to the IRS, a qualified appraisal must include the following information:
Under the 2017 Tax Cut and Jobs Act (TCJA), the cost of obtaining appraisals for donated property is not considered a charitable contribution; however, those appraisal fees paid to determine the amount allowable as a charitable contribution may qualify as a miscellaneous income tax deduction under IRC § 212.
The contribution of appreciated capital gain property to a qualified charitable organization, although not eligible for the 100% deduction, is still of great advantage because the inherent taxable gain (FMV less tax basis) is not taxable but the full FMV of the property is deductible, subject to limitations/carryover provisions where applicable.
The deduction allowed for the qualified contribution of inventory and other property is equal to the basis for the property, plus one-half of the inventory’s appreciated value. However, in no event may the deduction exceed twice the property’s basis.
The deduction for contributing automobiles, boats, aircraft, collections, jewelry and gems, real estate, business interests, art works, and other hard to value property to a qualified charitable organization when used in furtherance of its tax-exempt function, is the FMV of the property on the date of the contribution. If the contributed property is not used in furtherance of its tax-exempt function, the contribution deduction is limited to what the charitable organization actually realizes when it sells the property.
The charitable deduction allowable for a donated automobile is limited to the amount the charitable organization actually sells the car for (an acknowledgment specifying the amount deductible as a charitable contribution should be provided to the taxpayer by the charitable organization within the 30 days following car’s sale date) unless the car is used in furtherance of its tax-exempt function (a used car donated in poor condition to a local high school for use by students studying car repair is an IRS example of use in furtherance of a tax-exempt function).
The IRS advises that, except for inexpensive small boats, the charitable contribution valuation of boats should be based on a fair market appraisal by a marine surveyor because the physical condition is so critical to the value.
The IRS advises the following when establishing the FMV of “collections”:
Catalogs usually establish a category for coins, based on their physical condition—mint or uncirculated, extremely fine, very fine, fine, very good, good, fair, or poor—with a different valuation for each category.
The IRS advises that jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized jewelry appraiser. The appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is now in fashion. If not in fashion, the possibility of having the property redesigned, recut, or reset should be reported in the appraisal. The stone’s coloring, weight, cut, brilliance, and flaws should be reported and analyzed. Sentimental personal value has no effect on FMV. But if the jewelry was owned by a famous person, its value might increase.
The IRS advises that because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary. The appraiser must be thoroughly trained in the application of appraisal principles and theory. In some instances, the opinions of equally qualified appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions. The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and block number, as well as physical features, condition, and dimensions. The use to which the property is put, zoning and permitted uses, and its potential use for other higher and better uses are also relevant. In general, there are three main approaches to the valuation of real estate: comparable sales; capitalization of income; and replacement cost new or reproduction cost minus observed depreciation. An appraisal may require the combined use of two or three methods rather than one method only.
The IRS advises that the FMV of any interest in a business, whether a sole proprietorship, a limited liability company (LLC), a partnership, or a corporation, is the amount that a willing buyer would pay for the interest to a willing seller after consideration of all relevant factors. The relevant factors to be considered in valuing the © business are: the FMV of the assets of the business; the demonstrated earnings capacity of the business, based on a review of past and current earnings; the value of the goodwill of the business; and other factors used in evaluating corporate stock, if they apply. See IRS Revenue Ruling 59-60, 1959-1 CB 237.
The IRS advises that the FMV of paintings, antiques, and other objects of art, should be supported by a written appraisal from a qualified and reputable source (see discussion above), unless the deduction is $5,000 or less.
Art valued at $20,000 or more. If the donor/taxpayer claims a deduction of $20,000 or more for donations of art, they must attach a complete copy of the signed appraisal to their return. For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8×10-inch color photograph or a color transparency no smaller than 4×5 inches, must be provided upon request.
Art valued at $50,000 or more. If the donor/taxpayer donates an item of art that has been appraised at $50,000 or more, they can request a Statement of Value for that item from the IRS. The donor/taxpayer must request the statement before filing the tax return that reports the donation. The donor/taxpayer request must include the following:
If the donor/taxpayer’s request lacks essential information, they will be notified and given 30 days to provide the missing information.
If the donor/taxpayer claims a deduction of more than $500,000 for a donation of property, they must attach a qualified appraisal of the property to their return. This does not apply to contributions of cash, inventory, publicly traded stock, or intellectual property. If the donor/taxpayer does not attach the appraisal, they cannot deduct the contribution, unless the failure to attach the appraisal is due to reasonable cause and not to willful neglect.
The contribution of clothing or household goods to a qualified charitable organization must be in at least “good used condition” to qualify for deductibility. The price that buyers of used items pay in used clothing stores, such as consignment or thrift shops, is an indication of the value of the contribution. A qualified appraisal is required by the IRS for any single item of clothing or household item not in good used condition or better and for which a charitable contribution of more than $500 is claimed.
The contribution of the FMV of the “use of property” to a qualified charitable organization is not deductible because it is not considered a completed gift to the charity.
The contribution of personal services to a qualified charitable organization, regardless of their FMV, is not deductible. However, out-of-pocket expenses incurred in rendering the service are deductible, and for 2020, a deduction of 14 cents for each charitable mile driven is allowable.
Individual Retirement Account Qualified Charitable Distribution: A qualified charitable distribution (QCD) is an otherwise taxable distribution from an individual retirement account (IRA) (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that paid directly to a qualified charity. For tax year 2020, a qualified IRA owner can exclude from gross income up to $100,000 of a QCD made and the QCD can be used to satisfy any IRA required minimum distributions (RMDs) for the year. The amount of a QCD excluded from gross income is not considered in determining any deduction for other charitable contributions.
However, there is an exception to the general rule that was introduced by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019: the SECURE Act repealed the age cap for making contributions to a traditional IRA and thereby allowing individuals age 70½ or older to make deductible IRA contributions. The SECURE Act provides that for those who make both QCDs and deductible IRA contributions, the QCD that is excluded from income is limited to the QCD portion not made from the post 70½ deductible IRA contributions made by the donor.
In second part of this article, the author addresses limits placed on conservation easements.
James P. Crumlish is a Certified Public Accountant and Chartered Global Management Accountant with offices in Westhampton Beach, NY. He is a business consultant and provides tax and auditing services.
Mr. Crumlish can be contacted at (212) 996-3788 or by e-mail to firstname.lastname@example.org.
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