Can my entity qualify for a tax deduction if it donates a building or other personal property?
In general, charitable contributions of buildings and other personal property are deductible at their fair market value (FMV); however, some limitations apply. The donations might not be taken at fair market value when capital assets are held for 12 months or less, the property that is donated was created by the owners or when inventory is donated. In those cases the deductions would be limited to the basis in the property. If we look at inventory as an example, the deduction would only be the cost to produce the inventory, and any kind of appreciation since creation or mark up, would not be considered deductible as a donation. Similarly, contributing tangible personal property unrelated to the purpose of the charity can force deductions to be limited to lesser of the FMV or basis in the property.
Entities that are able to deduct the FMV of donated property may need to get an appraisal. An appraisal is necessary if the value of the claimed deduction is more than $5,000. There are a few exceptions to this rule, however – no appraisal is needed if the property falls in one of the below categories:
- Non-publicly traded stock of $10,000 or less,
- A vehicle for which your deduction is limited to the gross proceeds from its sale,
- Qualified intellectual property, such as a patent, or
- Inventory and other property donated by a corporation that are qualified within the meaning of section 170(e)(3)(A) of the Internal Revenue Code.
Now that we looked at the general limitations and appraisal requirements around the contribution of property, let’s focus on what type of property should be contributed.
If the entity owns highly illiquid or appreciated property, this property may lend itself as a prime candidate for charitable contribution. For illiquid property, a deduction for the donation of the property can be received without losing out on the income that a more liquid property would produce. For appreciated property with a low tax basis, paying capital gains tax on the appreciation can be avoided and a deduction can generally be received for the amount of the fair market value. Remember the property must have been owned for more than 12 months for this to be true. This strategy often works well when stock is the appreciated “property” that was held.
If the property has decreased in value, it might be best to sell that property and then use the proceeds as the donation. This way the entity can recognize the loss incurred on the property while still receiving a donation deduction of the cash contribution.
When considering your options, you should also keep in mind a few things as it relates to entity structure. For example, while buildings are generally not treated as ordinary income property by corporations, IRS code section 291 requires that 20 percent of the depreciation previously deducted should be treated as ordinary income. Thus, this amount will not be eligible to be included as a donation deduction.
Lastly, while an entity might be able to take a donation of appreciated property, if it is a pass-through entity, consideration should be given to the make-up of its shareholders or members. A large charitable donation may be limited on a shareholder’s or member’s personal tax return.
While the overall limitation on itemized deductions, including charitable contributions, has been suspended by tax reform, the above-mentioned property contribution deductions cannot exceed 50% of the adjusted gross income on the individual’s tax return. In some cases, 20% or 30% limits may also apply depending on the type of property and the receiving organization.