Many financial services companies make contributions of property or other assets that they no longer need under their business model. Typically, a donor corporation could expect to receive a tax deduction equal to the tax basis of the donated asset. However, donations of property that would produce long-term capital gain treatment if sold can produce deductions equal to fair market value (FMV), which could be far in excess of tax basis. This would normally occur within the context of a real property donation, and the balance of the article will discuss this situation. The resulting permanent tax benefit resulting from this excess deduction can be significant, but only if the donor institution can provide the appropriate documentation.
The IRS enforces strict documentation requirements when it comes to charitable contribution deductions. With proper documentation, taxpayers can claim a tax deduction in excess of their cost basis, which can be of significant financial benefit. Without accurate documentation, taxpayers risk not only losing out on the increased deductions but also ending up on the hook for penalties and interest due to underpayment of income taxes.
Generally, corporations can deduct contributions of property made to, or for the use of, a qualified organization. Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals, or that are governmental entities. The IRS maintains a listing of qualified charitable organizations that can be used to verify if a donation is eligible for deduction.
First, the donor must receive contemporaneous written acknowledgement from the qualified charitable organization. The written acknowledgement should include a description of the real property contributed and whether the donor received any goods or services in exchange for the property contributed.
A corporation (other than a closely held or personal service corporation) that claims a deduction of more than $500 for noncash contributions also must attach to its tax return a schedule describing the property and the method used to determine its FMV. The corporation also should keep a record of the approximate date and manner of acquisition of the property.
Closely held and personal service corporations must complete and attach IRS Form 8283, “Noncash Charitable Contributions,” to their returns if they claim a deduction of more than $500 in noncash contributions. Other corporations must complete and attach the form for charitable deductions that exceed $5,000. The form must be signed by both donor and donee.
A corporation must obtain a qualified appraisal for all deductions of real estate contributed with a FMV in excess of $5,000. The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000.
Qualified Appraisals and Appraisers
A qualified appraisal must be made by a qualified appraiser in accordance with generally accepted appraisal standards. It also must be made no earlier than 60 days before the date of the contribution and received before the due date (including extensions) of the tax return on which the deduction is claimed. If a deduction is first claimed on an amended return, the appraisal must be received before the date the amended return is filed.
For real estate, key elements of the appraisal must include a complete description of the property, including street address, legal description, lot and block number, physical features, condition, dimensions, zoning and permitted uses, the property’s actual use, and its potential use for other higher and better uses. A full description of the appraisal requirements can be found in the underlying regulations.
A qualified appraiser has either 1) earned an appraisal designation from a recognized professional appraiser organization or 2) met certain minimum education and experience requirements. For real property, the appraiser must be licensed or certified for the type of property being appraised in the state where the property is located. Additional information regarding the specific appraiser requirements also can be found in the underlying regulations.
Technical Tax Considerations
The ability to take a FMV deduction is premised on the fact that the property, if sold, would result in capital gain. If depreciable real property is contributed, recharacterization of some or all of the excess of FMV over tax basis as ordinary income might be required and would reduce the charitable contribution deduction. This recharacterization is dependent upon how depreciation was claimed on the property. A further discussion of the depreciation recharacterization is beyond the scope of this article.
Don’t Miss Out
The charitable donation deduction of appreciated property is not as straightforward as it might seem. Financial services companies planning on claiming a deduction for a contribution of noncash property must take care to comply with the documentation requirements or risk forfeiting significant economic benefits.