Charitable contribution
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Charitable contribution deductions for United States Federal Income Tax purposes are defined in section 170(c) of the Internal Revenue Code as "contributions to or for the use of certain listed nonprofit enterprises."
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Organization Eligibility
An organization must meet certain requirements set forth in the Code and then file with the Internal Revenue Service to gain status as a tax-exempt non-profit charitable organization.
A non-exhaustive list of organizations that may meet the Federal requirements are as follows:
- Synagogues, churches and other religious organizations;
- A fraternal order or lodge
- An organization of war veterans
- Any level of government if the contribution is made for exclusively public purposes
There are both public and private charities. Public charities are far more common.
General Statement on Benefit to Donor
Contributions to charitable organizations are deductible to the donor, unless the donee organization uses any of its net earnings to benefit a private shareholder, or if it attempts to in any way influence political campaigns or legislation.
A contribution to a charitable organization need not be fully a "gift" in the statutory sense of the word to be deductible to the donor. However, the donor's allowable deduction will be reduced by the amount of the "substantial benefit" conferred upon her as a result of her contribution.
To illustrate, suppose that the American Cancer Society is hosting a formal dance as a fund-raiser (the ACS is a certified charitable organization). Further suppose that the fair market value of a ticket to the dance is 75 USD, and the donor pays 375 USD to purchase a ticket thereto. The donor may claim only a 300 USD deduction, because the amount contributed (375 USD) is reduced by the amount of the benfit that she received (75 USD, the fair market value of the ticket). Bear in mind that this holds true even if the donor does not actually attend the dance.
Types of Contributions
The pariticular tax consequences of a donor's charitable contribution depends on the type of contribution that she makes. A taxpayer may contribute services, cash, or property to a charity.
Services
If the donor is contributing her services to a charity, she is not entitled to a deduction for those services. She is however, entitled to deduct her unreimbursed expenses that she incurred in rendering them (except for child care expenses, which are considered non-deductible personal expenses).
*Example*
Joy is a professional soccer player who lives in San Diego. She decides to volunteer her time at a non-profit (certified charity) soccer camp, located in Los Angeles for a week. In the ordinary course of things, Joy would charge 10,000 USD per day for these services, plus costs of transportation, board, and child care. Assume that Joy's driving costs (gas money, oil change, etc) amount to 150 USD, the cost of a hotel room for the week is 400 USD, and the cost of child care for her two kids is 500 USD for the week.
Joy is not entitled to deduct the 10,000 USD value of "free services" that she performed. Nor is she entitled to deduct the 500 USD of child care expenses incurred in the week she was volunteering. However, Joy may deduct the 150 USD car expenses, as well as the 400 USD hotel expenses incurred in her time volunteering at the camp, for a total deduction of 550 USD.
Cash
If the donor is contributing cash to the charity, the general rule is that there is only one limitation on the total amount that she is entitled to deduct: She may only deduct her contribution to the extent that it does not exceed 50% of her adjusted gross income. Any amount not deducted in the year she makes the contribution may be carried forward and taken the next year for up to 5 years. Ordinary assets and short-term capital gain assets (see below) are treated like cash for purposes of the 50 percent cap.
*Example*
To illustrate, suppose that the donor has an adjusted gross income of 100,000 USD. In the year 2004, she gives 60,000 USD in cash to the American Cancer Society. The donor may deduct only 50,000 USD in 2004. Why? Because anything over that amount is in excess of 50% of her adjusted gross income (100,000 adjusted gross income * .50 percent = 50,000). The remaining 10,000 USD (60,000 total donation - 50,000 deducted in 2004 = 10,000) carries forward to 2005, at which point she may deduct it.
Property
If the donor is contributing appreciated property, she is entitled to deduct the value of that property on her tax return for that year. Neither she nor the donee organization will pay tax on the appreciation in the property.
As is common in federal income taxation, there are several special rules and limitations that apply:
Ordinary Income Producing Property and Short Term Capital Gain Property
If the property that the donor is contributing would have produced either only an ordinary gain or a short-term capital gain had she sold it, then she may deduct only her adjusted basis in the contributed property. The taxpayer may not deduct contributions in an amount greater than 50 percent of her adjusted gross income (AGI) in the year of donation. Any excess may be carried forward for up to 5 years and may be deducted subject to the same limitations.
*Example*
Abby, our taxpayer, owns a sporting goods store. Her business is doing well so she decides to donate some of last season's inventory to The Women's Sports Foundation (http://www.womenssportsfoundation.org), a certified charitable organization.
Abby's adjusted gross income this year is 700,000 USD. The fair market value of Abby's donated inventory is 600,000 USD. Her adjusted basis in the inventory is 400,000 USD. If Abby had sold the inventory, she would have recognized an ordinary gain of 200,000 (fmv of 600,000 USD - adjusted basis of 400,000 USD = 200,000 USD).
To determine the amount that she may deduct as a charitable contribution, Abby must subtract the ordinary gain inherent in the inventory (the 200,000) from the inventory's fair market value (the 600,000). Thus, the amount of Abby's gift is 400,000 (fmv of 600,000 USD - inventory's inherent ordinary gain of 200,000 USD = 400,000 USD gift).
But remember, Abby may not deduct any contributions over 50% of her adjusted gross income. Recall that Abby's AGI is 700,000 USD. The amount of her gift is 400,000 USD. The result? Since 50% of her AGI equals 350,000 USD (700,000 USD * .50 = 350,000 USD), Abby may only deduct 350,000 USD of the 400,000 gift in the year that she donated it. However, assuming her AGI in year two remains at least 100,001 USD, and assuming that Abby makes no charitable contributions in year two, she may carry over the 50,000 USD (400,000 gift - 350,000 year one deduction = 50,000 carry over) to year two, and deduct it on her tax return that year.
Long-Term Capital Gain Property
If the donor is contributing property that would have yielded a long-term capital gain in a sale, then her deduction for the contribution is limited to 30 percent of her adjusted gross income in the year of donation. If the contribution exceeds 30 percent of her adjusted gross income, then the excess may be carried forward for five years, and may be deducted pursuant to the same restrictions.
Also note that the overall 50 percent cap applies. That is, if a taxpayer contributes cash or short term capital gain property worth over 50 percent of her adjusted gross income to a charity, and additionally contributes any long term capital gain property to a charity that same year, then she is not entitled to deduct the long term property's value that year because she has already reached the 50 percent overall cap on charitable deductions.