How does the IRS define the calculation for the allowed charitable contribution deduction?
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The IRS defines the calculation for the allowed charitable contribution deduction through a combination of statutory rules, regulations, and interpretive guidance. The calculation depends on several factors, including the type of property contributed, the recipient organization, the donor’s adjusted gross income (AGI), and whether the donor receives any benefit in return. Below is a comprehensive explanation of the key legal details and steps for calculating the allowed deduction:
1. General Rule for Deductibility
- Charitable contributions are deductible if they are made to a qualified organization and are paid within the taxable year. The deduction is only allowed if the contribution is verified as required by regulations.
- The deduction is generally claimed as an itemized deduction on Schedule A (Form 1040).
2. Qualified Organizations
- Contributions must be made to organizations described in IRC §170(c), such as U.S. charities, religious organizations, educational institutions, governments for public purposes, and certain others.
3. Amount of Deduction
a. Cash Contributions
- The deduction is the amount of cash actually paid, subject to AGI limitations (see below).
b. Noncash Contributions (Property)
- The deduction is generally the fair market value (FMV) of the property at the time of the contribution, reduced as required by IRC §170(e).
- FMV is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts.
c. Reductions for Certain Property
- For ordinary income property (e.g., inventory, property held less than one year), the deduction is limited to the lesser of FMV or the taxpayer’s basis.
- For capital gain property (e.g., appreciated property held more than one year), the deduction is generally FMV, but may be reduced if contributed to certain private foundations or if the property is not used for a related exempt purpose.
- For inventory contributions to certain charities (e.g., food banks), special enhanced deduction rules may apply, but the deduction is subject to specific valuation and substantiation requirements.
d. Contributions for Which the Donor Receives a Benefit
- If the donor receives goods or services in return, the deduction is reduced by the value of those goods or services.
4. Percentage Limitations (AGI Limits)
- The deduction is limited to a percentage of the donor’s AGI (called the “contribution base”):
- 60% of AGI for cash contributions to public charities (for years after 2025, per P.L. 119-21).
- 50% of AGI for noncash contributions to public charities.
- 30% of AGI for contributions to certain private foundations or for gifts of capital gain property to public charities.
- 20% of AGI for gifts of capital gain property to private foundations.
- Special rules apply for qualified conservation contributions and for farmers/ranchers, which may allow up to 100% of AGI.
- Carryover: Excess contributions can be carried forward for up to 5 years (15 years for conservation easements).
5. Substantiation and Reporting Requirements
- Cash contributions: Require a bank record or written communication from the donee showing the name of the organization, date, and amount.
- Noncash contributions: Require a receipt or written acknowledgment; for contributions over $500, Form 8283 must be filed; for contributions over $5,000, a qualified appraisal is generally required.
- Contemporaneous written acknowledgment is required for any contribution of $250 or more.
6. Special Rules
- Standard Deduction Filers: For tax years after 2025, a limited above-the-line deduction is allowed for cash contributions up to $1,000 ($2,000 for joint filers) even if the taxpayer does not itemize.
- 0.5% Floor: For tax years after 2025, only charitable contributions exceeding 0.5% of AGI are deductible, with carryover rules for the disallowed portion.
7. Valuation of Donated Property
- The FMV of donated property is determined by considering all relevant facts, including cost, comparable sales, replacement cost, and appraisals.
- For inventory or property approaching expiration, FMV may be less than usual selling price if the property could not reasonably be expected to sell at that price at the time of contribution.
8. Disallowance and Penalties
- Deductions may be disallowed for failure to meet substantiation requirements, improper valuation, or if the contribution is not to a qualified organization.
- Overstating the value of donated property can result in penalties of 20% or 40% of the underpayment, depending on the degree of overstatement.
9. Summary of Calculation Steps:
- Determine the type of property contributed (cash, ordinary income property, capital gain property, inventory, etc.).
- Identify the recipient organization’s status (public charity, private foundation, etc.).
- Calculate the value of the contribution (FMV, or basis if required).
- Reduce the deduction for any benefit received or for required reductions under IRC §170(e).
- Apply the appropriate AGI limitation (60%, 50%, 30%, 20%, or special rules).
- Ensure substantiation and reporting requirements are met (receipts, acknowledgments, appraisals, Form 8283).
- Carry forward any excess contributions as allowed.
- Apply any special floors or above-the-line deduction rules if applicable.
These rules are detailed in IRC §170, Treasury Regulations §1.170A-1, and IRS guidance.
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