Education may not officially be part of your nonprofit’s mission. But while working with donors, you’ve probably noticed that many are confused about the federal tax deductibility of their contributions. To help prevent unwelcome surprises when donors file their returns, inform them about the tax benefits of different types of donations.
Cash, ordinary income and capital gains property
Donors who itemize deductions generally can deduct contributions of money or property. For example, cash donations (including those made by check, credit card or payroll deduction) usually are 100% deductible. However, the value of any benefit (such as tickets, meals or merchandise) donors receive must be subtracted from the deductible amount.
The rules aren’t as simple for property. The deductibility of donations of ordinary income property generally is limited to the donor’s tax basis in the property — usually the amount the donor paid for it. Donors can deduct the property’s fair market value (FMV) less the amount that would be taxed as ordinary income or short-term capital gains (property sold within a year of acquisition) if they sold the property.
Donors of capital gains property usually can deduct its FMV. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But there are certain situations where only the donor’s tax basis of the property may be deducted, as in the case of intellectual property.
Tangible and other property types
Tangible personal property can be seen or touched — for example, furniture, books and jewelry. If your nonprofit uses donated tangible personal property for its tax-exempt purpose (such as when a museum displays a donated historical artifact) the donor can deduct its FMV. But if the property is put to an unrelated use — for example, a college sells the artifact — the deduction is limited to the donor’s basis in the property.
Other common types of donations are:
Vehicles. Generally, if a vehicle has an FMV greater than $500, the donor can deduct the lesser of the gross proceeds from its sale by the organization or the FMV on the donation date. But if your nonprofit uses the vehicle to carry out its tax-exempt purpose — for example, a children’s sports league that uses a donated school bus to transport kids to games — the donor can deduct the FMV. Be sure to provide Form 1098-C to your donor to attach to his or her tax return.
Property use. Say a supporter donates a week’s stay at her condo in Hawaii for an auction. Unfortunately, she can’t take a deduction because generally only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation easement.
Services. Donations of services — for example, when a personal trainer pledges a workout session as a raffle prize — aren’t deductible as contributions. However, any related out-of-pocket costs, such as supplies and miles driven for charitable purposes (14 cents per mile), are deductible.
Donors need to understand that there are additional limits on charitable deductions. Starting in 2018, a taxpayer’s total deduction can’t exceed 60% of his or her adjusted gross income (AGI). But donations of capital gains property generally are limited to 30% of AGI and contributions to some nonprofits, such as private foundations, have different limits.
Because the tax rules regarding charitable deductions can be nuanced, encourage supporters who are making large donations or contributing unusual gifts (such as conservation easements) to work with a tax advisor. Although you can provide general information about deductibility, you don’t want to anger donors or risk your nonprofit’s reputation by potentially giving advice that turns out not to be true. To be safe, include a disclaimer in any donation materials stating that tax treatment information shouldn’t be taken as advice for particular situations.