Charitable contribution substantiation is a team sport — everyone involved is critical to ensuring the donor’s tax deduction is valid. Although this is not a new area of tax law, it is an arena of continued tax litigation, with the IRS winning most cases on technicalities. The government is generally successful in the courtroom because the requirements allowing a donor a charitable contribution deduction are spelled out in detail in the Internal Revenue Code and supporting Treasury Regulations. Omitting any component leaves the door open for the IRS to disallow a charitable tax deduction based on a technical deficiency.
The Tax Cuts and Jobs Act of 2017 increased the value of charitable contributions in several ways. First, Congress raised the limitation on the amount allowed for cash contributions from fifty percent of a donor’s adjusted gross income to sixty percent. The Pease Amendment, which limited total itemized deductions for higher earning taxpayers, was also repealed. Finally, a host of other changes were made to itemized deductions, which may have a chilling overall effect on itemizing deductions over taking the standard deduction. However, for taxpayers who still itemize, more of their cash contributions will be deductible, presuming the donor properly documents their charitable contributions.
New Guidance Issued by IRS Concerning Charitable Substantiation
On July 30, 2018, the IRS issued final Regulations supporting legislation and Notices dating back to the Pension Protection Act of 2006 through the Tax Cuts and Jobs Act of 2017. The Regulations finalize the rules for substantiating and the reporting requirements for noncash charitable contributions. The effective date for the Regulations are July 30, 2018.
Substantiation rules vary depending upon the value and type of the noncash contribution. A noncash contribution means what it sounds like; any gift other than cash or its equivalent. Cash contributions include dollars and cents, a check, money order, wire transfer, or credit card. Noncash contributions are much broader and include everything from marketable securities to art, land, property rights, and cryptocurrency, which, despite its name, is not recognized as legal tender by any country.
To take a deduction on a U.S. tax return, all donations must be reduced to a U.S. dollar value.
What Substantiation is Required?
(These are general guidelines – See Regulations and Form 8283 Instructions for specific donations)
Gifts of less than $250 may be substantiated with a receipt showing the purchase price of the non-cash item. Items in this value range will be items a donor purchases and donates immediately to the charity, such as auction items or food and beverages for a fundraising event. A receipt is the only substantiation required to document the charitable contribution. However, a donor acknowledgment letter is recommended to document the charitable use of the donated items.
Gifts valued between $250 and $500 require only a proper contemporaneous donor acknowledgment letter from the charity. The letter provided by the charity must have a complete description of the item donated. However, a value amount should not be included. It is the donor’s responsibility to value any noncash charitable contribution. IRS Publication 1771 explains what must be included in a donor acknowledgment letter. The requirement most often overlooked, and therefore the cause of a loss of deduction, is language indicating whether the donor received goods or services as a result of the charitable contribution, a description of those goods or service, and a value provided by the charity.
Gifts greater than $500 are required to complete a Form 8283. Depending upon the value and type of gift donors may have to complete Section A, Section B, or potentially both Sections. For gifts valued up to $5,000, donors usually complete only Section A. Section A is also used by donors contributing publicly traded stock valued at more than $5,000 as no qualified appraisal is required for securities traded on an exchange in which quotations are published daily. The donor must still obtain an acknowledgment letter from the charity. The Regulations are clear; the Form 8283 is NOT a substitute for a contemporaneous donor acknowledgment letter required for all gifts valued at $250 or more.
Most gifts with a value greater than $5,000 must obtain a qualified appraisal. There are a few exceptions to the qualified appraisal requirement, including publicly traded securities, certain types of intellectual property, certain vehicles, and inventory. Individuals who donate artwork valued over $20,000, or most noncash items exceeding $500,000, must not only obtain the qualified appraisal, but they must also attach the appraisal to the tax return on which they are claiming the tax deduction for the charitable gift. A qualified appraisal will need to be attached to the return for certain façade easements no matter the value. A qualified appraisal can be required for lower valued gifts as well. This includes household items not in good or better condition valued at more than $500, but less than $5,000. An example could be a damaged vase or oriental carpet in need of repair. Gifts which must complete Section B of Form 8283 must also provide the basis information and other fair value data from the qualified appraisal.
Please review the regulations for what constitutes a “qualified appraisal” as this is another area where the IRS commonly disallows charitable contribution deductions based on technical deficiencies.
Carryforward Deduction Details
If a donor has completed a Form 8283 Section A or B and attached it to a tax return claiming a tax deduction in the year of contribution, but they were limited in their ability to take the full deduction, they may carryforward the excess deduction for five-succeeding tax periods. For gifts after July 30, 2018 to be allowed the charitable deduction carryforward, the Form 8283 must be attached to each of the subsequent tax years in which the taxpayer claims the carryforward charitable contribution deduction. In addition, for noncash gifts greater than $500,000, the taxpayer must also attach the qualified appraisal, even though this information was provided in the original year of the contribution. Failure to observe the details invites the IRS to disallow the deduction based upon the technical requirements of the Internal Revenue Code and Treasury regulations.
Who is Responsible?
Ultimately the donor is responsible for any tax return they file. However, donors have every reason to rely on the advice of a paid tax preparer. The CPA preparing the income tax return should attach the proper Forms 8283 and qualified appraisals to the tax returns. The tax professional should inquire about donor acknowledgement letters, but they can rely on the taxpayer’s assurance they have obtained the proper documentation. Taxpayers may want their CPA to review these letters for completeness when they file their tax return.
The charity must issue proper contemporaneous donor acknowledgment letters. However, the IRS will not sanction a charity for failing to do so unless the total value of the contribution exceeds $75 and the charity provided no quid pro quo value for the items provided in exchange. Other than this narrow circumstance, the IRS will not levy penalties on a charity for failing to issue donor acknowledgment letters. The only penalty on the charity is a very unhappy donor who lost their charitable contribution deduction and the word-of-mouth damage to the charity’s reputation when the donor tells everyone on Facebook!
If you have questions on proper substantiation of charitable contributions, please contact your tax advisor or email Clark Nuber.
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