Tax Article - Charitable Contributions
Charitable Contributions—Vehicles, Boats, and Planes
Under the new law, deductions for charitable contributions of vehicles, boats, and airplanes for which the claimed value exceeds $500 will depend on how the donated asset is used by the recipient charity. If the charity sells the asset without any significant intervening use or material improvement, the donor’s deduction is generally limited to the amount of gross sales proceeds. (When this rule applies, the actual fair market value of the donated asset is irrelevant.)
The new law also imposes strict substantiation requirements for contributions of vehicles, boats, and planes when the claimed value exceeds $500. Under these rules, no deduction is allowed unless the donor receives a contemporaneous written acknowledgment from the charity. That document must meet strict new guidelines. To be considered contemporaneous, the acknowledgment must be provided to the donor within 30 days of the date of the sale of the asset. A charity can be charged a penalty if it knowingly furnishes a false or fraudulent acknowledgment or if it knowingly fails to furnish an acknowledgment that meets all the new requirements. The penalty can be as high as $5,000. To the extent required by the IRS, charities must disclose to the IRS information included in acknowledgments given to donors. These unfavorable changes are effective for contributions made after 2004.
Tax Planning Impact: If you are considering making a charitable donation of a vehicle, boat, or plane in the near future, you should probably try to do so before year-end. That way, you can deduct the full fair market value of the donated asset, and the recipient charitable organization will only have to comply with the less-strict substantiation requirements imposed under current law.
Charitable Contributions—Other Noncash Donations
Under the 2004 Jobs Act, stricter donor reporting is required for certain contributions of property other than cash, inventory, or publicly traded securities. Specifically, all C corporations are now required to obtain a qualified appraisal for donated property if the claimed deduction exceeds $5,000 (this rule has long applied to individuals). If the claimed deduction for a donation of property other than cash, inventory, or publicly traded securities exceeds $500,000, a qualified appraisal must be attached to the donor’s tax return. This requirement applies whether the donor is an individual, partnership, or corporation. These unfavorable changes apply retroactively to contributions made after 6/3/04.
Charitable Contributions—Donations of Patents and Similar Intellectual Property
The new law provides that if a taxpayer contributes a patent or other intellectual property (other than certain copyrights or inventory) to charity, the taxpayer’s initial deduction is limited to the lesser of the property’s tax basis or its fair market value. The donor may be allowed to deduct additional amounts in later years based on a specified percentage of income received by the charity from the donated property. These additional amounts are calculated using sliding-scale percentages that decline over the years. No deduction is permitted for any income received by the charity after the expiration of the legal life of the patent or intellectual property. The donor must obtain an annual written substantiation from the charity of the amount of any income generated by the donated property. In turn, the charity must file an annual information return with the IRS to report the income and other required information. Under these rules, additional charitable deductions are not available for patents or other intellectual property contributed to most private foundations. These changes apply retroactively to contributions made after 6/3/04.
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