Beware the rules when giving non-cash items to charity
AS discussed in my November 26th column
, outright gifts of cash to charitable organizations are the easiest way of making gifts to charity. However, some of us may have valuable property but limited cash. If you still want to be charitable, giving other types of property can be just as advantageous, even though additional rules may apply. Knowing these rules can help avoid surprises when filing your tax returns.
Non-cash gifts can be divided into two broad categories: property that has lost value while you owned it and property that has gained value (appreciated property).
First, it may not make sense to donate property that has lost value, unless the charity can make good use of it in carrying out its charitable purpose. If you have loss property, you may be better off selling the item and donating the cash. You may even be able to deduct the loss on your tax return in addition to claiming a deduction for the cash.
Donating appreciated property can, in many cases, allow you to deduct the property's fair market value without recognizing the gain as income. For example, if you had sold the appreciated property instead of donating it, and the sale would have produced a long-term capital gain, you would be left with less cash to make a charitable donation.
Several rules might limit the deduction. Probably the most important rule limits the deduction to the property's basis (usually cost) if the contributed property is tangible personal property that is put to an unrelated use by the charity. For example, if a painting is donated to the University of Hawaii and is used for educational purposes by being displayed so it can be studied by students, that is a related use. If, however, the painting is sold by the charity to raise funds to be used for educational purposes, that is an unrelated use.
Another limitation relates to "ordinary income" property. This includes property you owned for less than 12 months and would result in a short-term capital gain if you sold it on the date you donated it. It also would include a work of art created by you. For this kind of property, your deduction generally is limited to your basis in the property.
You cannot deduct the value of your services rendered to a charity. You can, however, deduct out-of-pocket expenses and the use of your automobile for charitable activities. Automobile expenses can be either actual gas and oil cost or 14 cents per mile if you keep a reliable record of your mileage. For example, if you volunteer at the Honolulu Academy of Arts or the Honolulu Symphony, and the round trip drive from your home is 15 miles a day, you can deduct $2.10 for each daily trip. If you paid for parking, the out-of-pocket cost of parking would also be deductible.
While the tax rules can be complicated, we must all remember that the tax deduction is only one of the benefits. Doing good for our local community is the other.
More information can be found at Publication 526, available on the Internal Revenue Service web site, www.irs.gov. The IRS also provides a tool for determining whether a charity qualifies for deductible contributions. Publication 78 can be found at apps.irs.gov/app/pub78 to search for charities by their name.
Ken Kretzer is a senior tax manager for the Honolulu office of Grant Thornton LLP. He can be reached at firstname.lastname@example.org