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IRS TIGHTENS REQUIREMENTS FOR THE DEDUCTIBILITY
OF CONTRIBUTIONS AND OFFERS NEW INCENTIVES FOR GIVING
Charitable deduction rules have undergone major
refinements in past years. Many of these changes are outlined in the Pension
Protection Act of 2006, which applies to the tax deductibility of charitable
contributions made in 2007.
Individuals who itemize deductions may deduct
charitable contributions of cash or non-capital gain property to qualified
charitable organizations. The deduction would include any out of pocket
expenses, including mileage (calculated at 14 cents per mile), incurred by
an individual who donates his or her services to the charity.
GENERAL RULES
Generally, the maximum amount that can be deducted by any individual donor
in any tax year is 50% of that donor's adjusted gross income (AGI). A lower
maximum, 30%, applies for capital gain property contributed to public
charities. In this case, however, the donor can elect to claim as a
deduction his adjusted basis (to avoid the lower limitation) rather than the
fair market value of the property contributed to avoid the 30% limitation.
Additionally, contributions to semi-public and private charities have lower
allowable AGI thresholds (30% for non-capital gain property and 20% for
capital gain property). Any contributions made in excess of the applicable
limitations may be carried forward for five years.
For corporations, the limitation for deduction of
charitable contributions is 10% of the corporation's taxable income.
RECORDKEEPING
The new law imposes stricter recordkeeping requirements. Donors must be
prepared to substantiate the value of property contributed to charity. All
cash donations, regardless of amount, can be substantiated by the taxpayer's
bank statement or credit card. Donations made by debit or credit card can be
substantiated by the taxpayer's bank statement. Self-created contemporaneous
records are no longer acceptable documentation. Donors may not deduct a
charitable contribution of $250 or more unless the charitable donee has
provided a contemporaneous written acknowledgement of the contribution.
These requirements are in addition to existing requirements.
GOODS OR SERVICES RECEIVED IN EXCHANGE FOR
CONTRIBUTIONS
If a donor receives goods or services (meals, entertainment, etc.) in return
for a contribution, their deduction is limited to the amount by which the
value of the contribution exceeds the value of the goods and services
received in exchange.
However, a charity may provide token benefits to
contributors without reducing the amount of the donor's deduction. A charity
that provides goods or services in return for a contribution of more than
$75 must provide contributors with a written statement estimating the value
of goods and services provided.
In general, if the non-cash contribution is in
excess of $5,000, a qualified appraiser's signature is required. If the
non-cash contribution is $500,000 or more, the qualified appraisal must be
attached to the return.
For non-cash contributions of clothing and household
items, no deduction is allowed unless the items are at least in "good
condition." The term good condition has not been defined and there is no
further guidance from Congress. The limitation does not apply to gifts over
$500 for which the donor has a "qualified appraisal." In addition, the
Treasury is authorized to issue regulations denying deductions for items of
minimal value, such as socks and undergarments.
The definition of "qualified appraiser' has also
been modified to require that the appraiser be recognized by a professional
association or to otherwise have met minimum experience and education
requirements. The appraiser must also be specifically qualified to appraise
the type of property being valued and must perform appraisals on a regular
basis. The appraisers themselves are subject to fines and, in extreme cases,
disciplinary action for any valuation that results in a "substantial" or
"gross" valuation misstatement, except in the case that they can prove their
valuation was "more likely than not" the actual value. "Substantial"
misstatements are those in excess of 150% of the value and "gross"
misstatements are those in excess of 200% of the correct amount. The
taxpayer also faces penalties in the case of misstatement of value.
EXEMPT USE PROPERTY REQUIREMENT
If a donor contributes appreciated tangible personal property with a value
in excess of $5,000 to a public charity that fails to use the property for
its stated purpose within 3 years of the contribution, the donor must
recapture as income the difference between the deduction taken and the
donor's basis in the property. The donor can avoid recapture if the charity
certifies it intended an exempt use of the property and that use became
unfeasible. There is a $10,000 penalty for a false certification.
CHARITABLE DISTRIBUTIONS FROM IRA'S
For 2007, donors 70 years of age and older can now directly transfer up to
$100,000 from a traditional or Roth IRA to a public charity other than a
support organization or donor advised fund. The donor does not have to take
the distribution into income and is not entitled to a charitable
contribution deduction. Any distribution will count toward the donor's
required minimum distribution. This provision does not apply to
distributions that would not ordinarily have been taxable to the donor.
ENHANCED DEDUCTION FOR CONTRIBUTIONS OF BOOKS AND
FOOD
The new law extends the enhanced charitable deduction for donations of food
and book inventory to include contributions of food and book inventory by
taxpayers engaged in a trade or business. The amount of the deduction is
limited to the lesser of tax basis plus percentage of fair market value in
excess of tax basis, or (ii) two times tax basis. The contribution deduction
is limited to 10% of the net income for the taxable year and the
contribution must be used for the purpose of caring for the ill, the needy
or infants. In the case of contributions of books, the donee organization
must certify in writing that the books are suitable for, and will be used
in, the donee organization's educational programs.
CALIFORNIA CONFORMITY
Please note that California has not yet conformed to any of the provisions
included in the Pension Protection Act of 2006.
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