How should non-cash charitable contributions be valued for tax deduction purposes?

Non-cash charitable contributions must be valued according to specific rules set out in the Internal Revenue Code, Treasury Regulations, and IRS guidance. The value you may deduct is generally the fair market value (FMV) of the property at the time of the contribution, but there are important nuances and requirements depending on the type of property and the circumstances of the donation.

1. General Rule: Fair Market Value (FMV)

• Definition of FMV: FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.
• Timing: The FMV is determined as of the date of the contribution.

2. Special Rules for Certain Types of Property

a. Property Sold in the Course of Business (e.g., Inventory)

• Usual Market: If the property is of a type the taxpayer sells in the course of business, FMV is the price the taxpayer would have received in the usual market at the time and place of the contribution, and in the quantity contributed.
• Adjustments for Discounts/Allowances: Any trade discounts or allowances that would have applied in the usual market must be taken into account. The value should reflect the net price actually received in the market, not a higher list or gross price.
• Aged or Near-Expiration Inventory: If the property is contributed at a time when it could not reasonably have been expected to realize its usual selling price (e.g., inventory near expiration), the value is the amount for which the quantity contributed would have been sold at the time of the contribution, not the usual selling price.

b. Used Personal Items (Clothing, Household Goods)

• Condition: Generally, only items in good used condition or better are deductible. If an item is not in good used condition and the claimed deduction is over $500, a qualified appraisal is required.
• Valuation: The value is what buyers actually pay in thrift or consignment shops for similar items in similar condition.

c. Art, Collectibles, and Unique Items

• Appraisal: For items valued over $5,000, a qualified appraisal is required. For art valued at $20,000 or more, the appraisal must be attached to the return.
• Factors: Consider authenticity, condition, provenance, and recent sales of comparable items.

d. Real Estate

• Appraisal: A detailed appraisal by a qualified appraiser is generally required.
• Methods: Comparable sales, capitalization of income, and replacement cost (with adjustments for depreciation and obsolescence) are common methods.

e. Stocks and Bonds

• Publicly Traded: Use the average of the highest and lowest quoted selling prices on the date of the contribution.
• No Sales on Date: Use the average of the nearest sales before and after the contribution date, weighted by the number of days.

3. Reductions to FMV

• Ordinary Income Property: If the property would have produced ordinary income or short-term capital gain if sold, the deduction is limited to the lesser of FMV or the taxpayer’s basis.
• Special Rules for Inventory: For inventory, the deduction is generally limited to the lesser of FMV or basis, unless a special enhanced deduction applies (e.g., for certain food inventory donations).

4. Substantiation and Documentation

• Form 8283: Required for noncash contributions over $500. For contributions over $5,000, a qualified appraisal is generally required and Section B of Form 8283 must be completed.
• Contemporaneous Written Acknowledgment: For contributions of $250 or more, a written acknowledgment from the donee is required.
• Qualified Appraisal: Must be from a qualified appraiser, not involved in the transaction, and must meet IRS requirements.

5. Special Considerations

• Partial Interests: Generally, no deduction is allowed for a contribution of less than the taxpayer’s entire interest in property, with limited exceptions (e.g., undivided interests, qualified conservation contributions).
• State or Local Tax Credits: If a state or local tax credit is received in exchange for a contribution, the deductible amount must be reduced by the value of the credit, unless the credit is 15% or less of the contribution.

6. IRS Scrutiny and Burden of Proof

• Burden on Taxpayer: The taxpayer must substantiate both the value and the eligibility of the deduction. Failure to provide required documentation (e.g., Form 8283, qualified appraisal) can result in disallowance of the deduction.
• Valuation Disputes: The IRS may challenge valuations that are not properly substantiated or that do not reflect the actual market value, especially for inventory, aged goods, or large donations.

7. Summary Table of Key Steps for Valuing Non-Cash Charitable Contributions

1. Determine FMV as of the date of contribution, using the appropriate market and considering all relevant factors.
2. Apply any required reductions (e.g., for ordinary income property, inventory, or state/local tax credits).
3. Obtain and retain required documentation (Form 8283, qualified appraisal, written acknowledgment).
4. Use the correct valuation method for the type of property (e.g., comparable sales for real estate, thrift shop prices for used clothing, net wholesale price for inventory).
5. Be prepared to substantiate the claimed value and deduction to the IRS.

Failure to follow these rules can result in the disallowance of the deduction or penalties for overstatement.