Charitable contribution
Encyclopedia
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 nonprofit enterprises. See
to gain status as a tax-exempt non-profit charitable organization under section 501(c)(3) of the tax code.
A non-exhaustive list of organizations that may meet the Federal requirements are as follows:
There are both public and private charities. Public charities are far more common.
, 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 them as a result of their 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 benefit that he 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.
, or property
to a charity. There are a number of traps, especially that donations of short-term capital gains are generally not tax deductible.
for a week. In the ordinary course of things, Joy would charge 10,000 USD 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.
. Any amount not deducted in the year he 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 % cap.
, he is entitled to deduct the value of that property on his tax return for that year. Neither he 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:
or a short-term capital gain had he sold it, then he may deduct only his adjusted basis
in the contributed property. The taxpayer may not deduct contributions in an amount greater than 50 % of his 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.
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, 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 x .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......
If a donor is contributing property that would have yielded a long-term capital gain in a sale, then the deduction for the contribution is limited to 30% of donor's adjusted gross income in the year of donation if the donee is a public charitiy, and limited to 20% if the donee is a private foundation. Contributions over the respective AGI thresholds may be carried forward for five years, and may be deducted in subsequent years pursuant to the same restrictions. This restriction helps certain investors avoid giving themselves into such a low bracket that the tax value of the donation is impaired.
I.R.C. 170(e)(1)(A) provides:
(e) Certain contributions of ordinary income and capital gain property
(1) General rule
The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of—
(A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution) ...
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Federal Income Tax
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
purposes are defined in section 170(c) of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
as contributions to or for the use of certain nonprofit enterprises. See
Exclusions of certain amounts from deduction
Certain portions of the market value of non-cash donations, such as short-term capital gains, are made non-deductible by I.R.C. 170(e)(1)(A).Organization Eligibility
An organization must meet certain requirements set forth in the Code. Some organizations must also file a request with the Internal Revenue ServiceInternal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
to gain status as a tax-exempt non-profit charitable organization under section 501(c)(3) of the tax code.
A non-exhaustive list of organizations that may meet the Federal requirements are as follows:
- SynagogueSynagogueA synagogue is a Jewish house of prayer. This use of the Greek term synagogue originates in the Septuagint where it sometimes translates the Hebrew word for assembly, kahal...
s, churches and other religiousReligionReligion is a collection of cultural systems, belief systems, and worldviews that establishes symbols that relate humanity to spirituality and, sometimes, to moral values. Many religions have narratives, symbols, traditions and sacred histories that are intended to give meaning to life or to...
organizations; - A fraternal order or lodge
- An organization of war veterans
- Any level of governmentGovernmentGovernment refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
if the contribution is made for exclusively public purposes - An organization dedicated to the improvement of public health in the U.S. or abroad
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 donorDonation
A donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause. A donation may take various forms, including cash, services, new or used goods including clothing, toys, food, and vehicles...
, 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
Legislation
Legislation is law which has been promulgated by a legislature or other governing body, or the process of making it...
.
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 them as a result of their contribution.
To illustrate, suppose that the American Cancer Society
American Cancer Society
The American Cancer Society is the "nationwide community-based voluntary health organization" dedicated, in their own words, "to eliminating cancer as a major health problem by preventing cancer, saving lives, and diminishing suffering from cancer, through research, education, advocacy, and...
is hosting a formal dance as a fund-raiser (the ACS is a certified charitable organization). Further suppose that the fair market value
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
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 benefit that he 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 particular tax consequences of a donor's charitable contribution depends on the type of contribution that he makes. A taxpayer may contribute services, cashCash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
, or property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
to a charity. There are a number of traps, especially that donations of short-term capital gains are generally not tax deductible.
Services
If the donor is contributing his services to a charity, he is not entitled to a deduction for those services. He is however, entitled to deduct his unreimbursed expenses that he 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 AngelesLos Angeles, California
Los Angeles , with a population at the 2010 United States Census of 3,792,621, is the most populous city in California, USA and the second most populous in the United States, after New York City. It has an area of , and is located in Southern California...
for a week. In the ordinary course of things, Joy would charge 10,000 USD 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 he is entitled to deduct: He may only deduct his contribution to the extent that it does not exceed 50% of his adjusted gross incomeAdjusted Gross Income
For United States individual income tax, taxable income is adjusted gross income less allowances for personal exemptions and itemized deductions. Adjusted gross income is total gross income minus specific items laid out in the tax code...
. Any amount not deducted in the year he 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 % cap.
Example
To illustrate, suppose that the donor has an adjusted gross income of 100,000 USD. In the year 2004, he 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 his adjusted gross income (100,000 adjusted gross income * 50 % = 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 he may deduct it.Property
If the donor is contributing appreciated propertyAppreciation
In accounting, appreciation of an asset is an increase in its value. In this sense it is the reverse of depreciation, which measures the fall in value of assets over their normal life-time...
, he is entitled to deduct the value of that property on his tax return for that year. Neither he 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 gainOrdinary income
Under the United States Internal Revenue Code, the type of income is defined by its character. Ordinary income is usually characterized as income other than capital gain...
or a short-term capital gain had he sold it, then he may deduct only his adjusted basis
Adjusted basis
In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes...
in the contributed property. The taxpayer may not deduct contributions in an amount greater than 50 % of his 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, 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 x .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
Charitable donations to public charities and private foundations are subject to overall caps of 50% and 30%, respectively. For example, if a taxpayer contributes cash or short term capital gain property to a public charity, and that cash and property is greater than 50% of his or her adjusted gross income, then any additionally contribution (including long term capital gain property) to any charity in that same year can not be deducted.If a donor is contributing property that would have yielded a long-term capital gain in a sale, then the deduction for the contribution is limited to 30% of donor's adjusted gross income in the year of donation if the donee is a public charitiy, and limited to 20% if the donee is a private foundation. Contributions over the respective AGI thresholds may be carried forward for five years, and may be deducted in subsequent years pursuant to the same restrictions. This restriction helps certain investors avoid giving themselves into such a low bracket that the tax value of the donation is impaired.
Short-Term Capital Gain Property
A trap for the unwary U.S. investor with an asset on which there have been gains in value who contributes the asset before the gains become long-term. The premature gift forfeits deduction of the short-term gains. The asset can be deducted only up to the amount of its basis, and not up to the amount of its appreciated market value. Only an investor who holds the asset until the capital gains have become long-term is allowed to deduct the appreciated market value.I.R.C. 170(e)(1)(A) provides:
(e) Certain contributions of ordinary income and capital gain property
(1) General rule
The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of—
(A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution) ...
Short-Term Capital Loss Property
A further trap awaits the unwary U.S. investor who donates depreciated assets—assets on which there have been losses in value—to charity. The gift actually forfeit the tax deductibility of the capital losses, and only the depreciated (low) market value at the time of the gift is allowed to be deducted, rather than the higher basis. However an investor can instead sell the depreciated assets before considering a donation. An investor who sells can realize the resultant capital loss, which may then be deducted under the applicable capital loss rules. The cash proceeds after liquidating the depreciated asset may of course be donated to charity and deducted following the sale, but the tax advantages of making such donation are no better or worse than in any cash donation to charity. In any case, such a course leaves the investor more after-tax assets to donate if so inclined.See also
- Davis v. United States (1990)Davis v. United States (1990)Davis v. United States, was a case before the United States Supreme Court.-Background:FactsA husband and wife, members of The Church of Jesus Christ of Latter-day Saints, transferred funds into the personal checking accounts of their two sons, who were called to service as full-time, unpaid...
- US Supreme Court case refining the definition of charitable contribution - Substantiating Cash Contributions of $250 or More by Richard R. Hammar
- Tampering with Donors' Designated Contributions by Richard R. Hammar