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Public Policy
Noncash Donation Reforms
Pension Protection Act Changes Rules for Some Property Donations
Several important changes for charitable contributions are now in effect as a result of enactment of the Pension Protection Act in August 2006, including new restrictions on donations of various types of property.
See a summary (PDF) on the IS website for more information on new rules for donations of land for conservation purposes, historic façade easements, taxidermy property, partial interests in personal property such as artwork, and stricter appraisal requirements.
Substantiation of Charitable Donations
The Internal Revenue Service is proposing changes to substantiation rules for both cash and noncash charitable donations. The new rules implement changes enacted by Congress in the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. The IRS had previously issued interim guidance on the changes, but this proposal will formally change the regulations. The new rules cover:
· recordkeeping requirements for all cash donations;
· rules for clothing and household donations;
· definitions of qualified appraisal and appraiser for donations of property over $5,000;
· special rules for payroll deductions
The IRS requests public comment by November 5 and will also hold a public hearing if one is requested. Read the proposed rule in the August 7, 2008 Federal Register.
Noncash Coalition Writes Senate Finance Leaders
Independent Sector was among the 288 national, state, and local
organizations that signed the Noncash Contribution Coalition's July
2005 letter (PDF) to Senators Charles Grassley (R-IA) and Max Baucus (D-MT), urging
them to move with caution in drafting legislation related to the
donation of noncash gifts. The coalition opposes proposals that
would replace the current rules, which enable donors to deduct from
their income taxes the fair market value of a noncash gift, with
limits that would allow only the deduction of the lesser of the
donor's cost basis or fair market value. The letter asks the Senators
to consider the reforms recommended by the Panel
on the Nonprofit Sector, which are designed to increase the
accuracy of valuation without discouraging donations. The Panel's
recommendations include strengthening the definitions of qualified
appraisal and expanding penalties for grossly inflated valuations.
More on charitable
incentives and reforms legislation.
American Jobs Creation Act of 2004
Provisions to limit the deductions taxpayers
can take for donations of vehicles,
patents and intellectual
property were included in American Jobs Creation Act of
2004 (AJCA)
that President Bush signed the bill into law on October 22, 2004.
The law requires that if a taxpayer contributes a patent or other
intellectual property to a charitable organization, the donor's
initial charitable deduction is limited to the lesser of the donor's
basis (what the donor spent to create the donated property) or the
fair market value of the property. The AJCA also includes new reporting
requirements for corporate noncash donations. C
corporations will now be required to follow the current requirement,
applicable to individuals, that the donor must obtain a qualified
appraisal of the property being donated for deductions over $5,000.
It also requires that all donors attach the appraisal to their tax
return if the contribution exceeds $500,000.
Patents and Intellectual Property
The AJCA limits a donor's deduction for contributions of a
patent or other intellectual property (such as copyrights, trademarks,
software or similar property) to the donor's basis or fair market
value, whichever is smaller. The donor's basis is defined
as what the donor spent to create the donated property. In addition,
the donor is permitted to claim subsequent charitable deductions
for up to 12 years based on a percentage of the income the charity
receives as a result of the contributed property. A deduction for
increased income is permitted only if it exceeds the value of the
initial deduction. Additional deductions are not permitted
for donations of patents or intellectual property to private foundations.
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The charity must report to the IRS income received with respect to the contributed property. The donor must obtain written substantiation from the charity regarding any income from the donated property.
On May 23, 2005, the IRS issued guidance and temporary regulations (PDF) for reporting charitable donations of intellectual property. These rules implement provisions in the American Jobs Creation Act of 2004 (AJCA). The new guidance (Notice 2005-41) (PDF) details steps IP donors must take to notify donee organizations of their intent to claim additional deductions for their eligible contribution. More on this guidance.
Under previous law, donors could deduct the fair market value of donations of intellectual property. The new restrictions may result in fewer such donations to charities such as universities. Keeping track of increased income attributable to the donation will also involve more paperwork for the recipient universities.
Background
Gifts of donated property, clothing, vehicles, and other non-cash items have long been an important source of revenue for many charitable nonprofit organizations. Currently, taxpayers who itemize deductions are allowed to deduct the fair market value of property donated to a qualified charitable organization. If the property is valued at $5,000 or more, the taxpayer must obtain an independent appraisal of the property to claim a tax deduction. If the property is valued over $500, the taxpayer must attach to their tax return a Noncash Charitable Contributions Form 8283 with a description of the donated property and the name and address of the charity receiving the donated property. The IRS provides guidance to taxpayers (Publication 561) (PDF) about how to determine the fair market value of their donated property.
Charities and taxpayers alike must meet certain obligations under current regulations for in-kind or noncash donations:
Taxpayer's Obligations:
Contributions of $250 or more—Taxpayers must get and keep a written acknowledgement from the charity that describes any benefit received by the donor in return for the contribution, or if none, a statement to that effect. IRS Publication 1771 (PDF) provides helpful information on acknowledgement and disclosure requirements for charitable contributions.
Property Donations—Special rules apply for determining the value of donated property, for the records that the donor must keep, and for the documents that must be filed with the IRS. Donors should consult with a tax specialist and with IRS Publication 561, Determining the Value of Donated Property (PDF).
- Receipt—Taxpayers must get and keep a letter or receipt
from the charity with a "reasonably detailed" description
of the property. A letter or receipt is not required where impractical,
for example, for property left at an unattended drop site.
- Keep records of fair market value—Taxpayers must also keep records of the name and address of the charity, date and location of the contribution, description of the property, and the fair market value of the property and how it was determined.
- Property donations over $500—taxpayers are required to attach Form 8283 to their returns.
- Property donations over $5000—taxpayers need to get an independent appraisal of the property.
Charity's Obligations:
Contributions of $250 or more—Charities must send the donor a written acknowledgement of the contribution that describes any benefit, if any, received by the donor in return for the contribution, or if none, a statement to that effect.
Property Donations—Charities must file Form 8282, Donee Information Form, for donated property of over $500 that is disposed of within 3 years of the donation and send a copy of the Form to the donor.
Last updated: August 7, 2008
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