Deductions for doing good
As seen in Long Island Business News
There’s a reason nonprofit organizations receive most of their donations in the fourth quarter. Individuals and companies are looking for tax deductions before the close of the year and, in addition to doing something good for others, charitable contributions allow them to do some good for their own bottom line.
Donors can get deductions for a wide variety of charitable contributions – from cash and securities to inventory and vehicles – but there are certain rules and restrictions.
“Like any series of tax laws that have gone through many changes over the years, there are all kinds of complications,” said John Repetti, a partner at Citrin Cooperman, which has an office in Plainview.
For starters, the gift must go to a qualified charity, which includes a wide range of organizations, such as human service agencies, houses of worship, educational institutions, hospitals, medical research organizations and museums. Exclusions include labor unions, chambers of commerce and political groups, said Elliot Ratner, a tax manager at Israeloff, Trattner & Co. CPAs in Great Neck.
A taxpayer can get a deduction for cash donations of up to 50 percent of his adjusted gross income, according to Daniel G. Mazzola, a Massapequa-based certified public accountant who is also an investment advisor with American Portfolios. The limit is lower in some situations; for instance, it’s 30 percent if the donations are made to private, non-operating foundations. But if the taxpayer exceeds the threshold in a given year, the excess amount can be carried over for five years for tax deduction purposes, Repetti said.
The simplest way to make a charitable gift is with cash.
“Cash doesn’t necessarily have to be cash – it includes checks and credit card payments,” Ratner said. “Some people don’t realize that if you charge a donation with your credit card on Dec. 31, you still get the deduction in the year you made the charge, even if you don’t pay the bill until the following year.”
It’s important to get and keep receipts for all donations, said Larry Lucarelli, a partner at Hauppauge accounting firm Albrecht, Viggiano, Zureck & Co. For small donations, canceled checks and credit card receipts will do, but for donations of $250 or higher, the donor should receive a written acknowledgement from the charity, he said.
Sometimes donors will attend a dinner dance or other fundraiser for, say, their church or temple. But the donor can only claim a deduction for the portion of the funds for which he derived no benefit.
“If you pay $500 for two tickets, and you get a meal, and the value of the meal is $100 per person, you can only get a deduction for $300,” Ratner said.
To qualify for a deduction for a donation of household goods, the IRS requires that these items be in good, usable condition.
“There’s no definitive definition of what that means, but that’s the standard for household items like electronics, linens and clothes,” Ratner said.
Organizations will provide a receipt for the donation, but most will not assign a dollar value to the goods. Donors have to estimate the value, and that’s where they may get into trouble.
“You have to look at the fair market value at the time of the contribution, not what you originally paid for it,” Ratner said. “Even if you paid $75 or $100 for a men’s shirt, the IRS may only allow about $5 or $10 for it.”
Taxpayers must itemize donations of property greater than $500 on Form 8283. When the donation exceeds $5,000, an appraisal is required, Lucarelli said.
Another popular gift category is cars, boats and other vehicles, which charities turn around and sell to raise funds, Lucarelli said.
“You can only deduct the amount that the organization sells the vehicle for,” he said.
Donors may consider making charitable gifts of appreciated stock to a charity instead of cash. This allows the donor to avoid paying the capital gain on the sale of the investment, Repetti said. Contributions of stocks and other capital gain property cannot exceed 30 percent of the taxpayer’s adjusted gross income.
Some do-gooders find it rewarding to donate their time to help a charity, but volunteering doesn’t come with any tax rewards.
“You can’t deduct the value of your time,” Ratner said. “But you can deduct mileage or other travel expenses associated with volunteering. And if you need to purchase a uniform for volunteering – such as if you’re a candy-striper at a hospital – you can deduct that.”
For businesses making charitable contributions, the rules vary with the company’s structure.
For flow-through entities like partnerships and S corporations, “the deductions will be taken on the individual tax returns of the owners or shareholders,” Mazzola said.
For C corporations, tax deductions for charitable contributions cannot exceed 10 percent of taxable income.