What is the method for determining the allowed charitable contribution deduction for a taxpayer?
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The method for determining the allowed charitable contribution deduction for a taxpayer under the Internal Revenue Code (IRC) is governed primarily by IRC § 170 and its associated Treasury Regulations. The process involves several key steps and considerations, which are outlined below:
1. Identify the Nature of the Contribution
- Cash vs. Property: Determine whether the contribution is made in cash or property. The rules for valuation and deduction limits differ depending on the type of contribution.
- Recipient Organization: The recipient must be a qualified organization as defined in IRC § 170(c). Contributions to individuals or non-qualified organizations are not deductible.
2. Determine the Amount of the Contribution
A. Cash Contributions
- The deduction is generally the amount of cash actually paid during the taxable year.
B. Property Contributions
- The deduction is generally the fair market value (FMV) of the property at the time of the contribution, subject to certain reductions and limitations.
- FMV Definition: FMV is 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. Special Rules for Certain Property
- Ordinary Income Property: If the property would have generated ordinary income or short-term capital gain if sold, the deduction is limited to the taxpayer’s basis in the property.
- Capital Gain Property: For property that would have produced long-term capital gain, the deduction is generally FMV, but may be reduced in certain cases (e.g., gifts to certain private foundations or gifts of tangible personal property not used for the charity’s exempt purpose).
- Inventory and Food Contributions: For inventory, the deduction is generally limited to the lesser of FMV or basis, but enhanced deductions may be available for certain contributions of food inventory, subject to special rules and limitations.
3. Apply Percentage Limitations
- Individuals: The deduction is subject to percentage limitations based on the taxpayer’s “contribution base” (generally adjusted gross income, AGI):
- 60% of AGI for cash contributions to public charities (with coordination rules for other contributions).
- 50%, 30%, or 20% limits may apply depending on the type of property and the recipient organization.
- For tax years beginning after December 31, 2025, a 0.5% floor applies: only contributions exceeding 0.5% of the taxpayer’s contribution base are deductible.
- Corporations: The deduction is generally limited to 10% of taxable income, with a 1% floor for tax years beginning after December 31, 2025.
4. Reduce for Any Consideration Received
- If the taxpayer receives goods or services in exchange for the contribution, the deductible amount is reduced by the FMV of what was received.
5. Substantiation and Recordkeeping Requirements
- Cash Contributions: Must be substantiated by a bank record or written communication from the donee showing the name of the donee, date, and amount.
- Noncash Contributions: Require a receipt from the donee with details about the property, and for contributions over $500, additional information is required. For contributions over $5,000, a qualified appraisal and Form 8283 are generally required.
- Contributions of $250 or More: Require a contemporaneous written acknowledgment from the donee.
6. Carryover of Excess Contributions
- If the allowable deduction exceeds the applicable percentage limitation, the excess may be carried forward for up to five succeeding tax years, subject to the same limitations in those years.
7. Special Rules for Split-Interest Trusts and Partial Interests
- Deductions for contributions of partial interests in property are generally not allowed unless an exception applies (e.g., a remainder interest in a personal residence or farm, an undivided portion of the taxpayer’s entire interest, or a qualified conservation contribution).
- For charitable lead annuity trusts (CLATs) and other split-interest trusts, the deduction is generally limited to the present value of the interest passing to charity, and strict requirements must be met for the trust instrument and administration.
8. Other Considerations
- No Deduction for Services: The value of donated services is not deductible, but unreimbursed out-of-pocket expenses incurred in performing services for a qualified charity may be deductible.
- No Deduction for Lobbying or Political Contributions: Amounts paid to organizations for lobbying or political campaign activities are not deductible.
9. Summary of the Method
In summary, the allowed charitable contribution deduction is determined by:1. Identifying the type and value of the contribution (cash or property, and FMV or basis as appropriate).2. Applying any required reductions (e.g., for ordinary income property, consideration received, or special property rules).3. Applying the applicable percentage limitations and floors based on the taxpayer’s income and the type of recipient.4. Ensuring all substantiation and recordkeeping requirements are met.5. Carrying forward any excess contributions as permitted.
Failure to comply with substantiation or valuation requirements can result in disallowance of the deduction.
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