FEDERAL TAXATION

CHARITABLE CONTRIBUTIONS BY INDIVIDUALS

By Richard Greenfield, CPA,
Reminick, Aarons & Company, LLP

Individuals can deduct charitable contributions made to qualified charitable organizations. Qualified charitable organizations include--

* the United States, a state, a locality, Washington, D.C., or a U.S. possession;

* a community chest, corporation, trust, or foundation, organized under the laws of the United States, any state, Washington, D.C., or U.S. possession and operated exclusively for religious, charitable, scientific, literary, or educational purposes, for the prevention of cruelty to children or animals, or to foster national or international amateur sports competition;

* war veterans' organizations;

* cemetery companies owned and operated for the benefit of their members and not operated for profit or for the benefit of any private shareholder or individual;

* domestic fraternal societies, orders, and associations operating under the lodge system.

Qualified charitable contributions generally do not include amounts paid for the benefit of foreign charitable organizations unless a U.S. organization transfers funds to the foreign charity and the U.S. organization controls the use of the funds, or the foreign organization is only an administrative arm of the U.S. organization. Certain Canadian charities may also qualify.

Types of Contributions

Contributions can be in cash or property. Cash contributions include those paid in cash, by check, and by credit card and out-of-pocket expenses incurred when donating services. Year-end contributions may be charged on a credit card and deducted in the year charged even if the charges aren't paid until the next year. Automobile expenses incurred while providing services to a qualified charitable organization are deductible. Direct expenses, such as gasoline and oil, are deductible, but general repair and maintenance, depreciation, registration fees, and insurance are not. In lieu of figuring actual expenses, individuals may use the standard mileage rate of 14 cents per mile for 1998 and 1999. Under either method, parking fees and tolls are also deductible.

In addition to cash contributions, individuals may donate property to a qualified charity. Generally, the deduction is equal to the fair market value of the property on the date of the contribution. If the fair market value is less than the basis (usually, the cost of the item), the deduction is limited to the fair market value. If the fair market value exceeds the basis, the deduction is equal to the fair market value, unless the property is ordinary income property or certain capital gain property.

Ordinary income property is property whose sale would result in ordinary income or short-term capital gain. Examples include inventory, artwork, or manuscripts created by the donor; business assets subject to depreciation recapture; and securities held for one year or less. The deduction for the donation of ordinary income property is the fair market value less the amount that would be ordinary income or short-term capital gain if the property were sold at its fair market value. Generally, the resulting deduction is limited to the individual's basis in the property.

Capital gain property is any property that would result in a long-term capital gain if it were sold at its fair market value on the date of the contribution. It includes stocks, bonds, jewelry, coin or stamp collections, real property, and depreciable property used in a trade or business or held for the production of income. Generally, a donation of capital gain property is deductible at its fair market value on the date of the gift. However, the deduction is limited to the basis of the property if the property is donated to certain private nonoperating foundations or the gift is tangible personal property used for purposes that are unrelated to the organization's tax-exempt purpose.

A taxpayer may elect to treat contributions of capital gain property as subject to the 50% limitation (discussed later) if the deduction is limited to the property's basis. The election applies to all capital gain property contributed during the tax year and to carryovers of capital gain property contributed from an earlier year.

Contributions are limited to the amount by which the contribution exceeds the value of goods or services received in exchange. For example, the purchase price paid for a ticket to a charitable event such as a dinner or show must be allocated between the value of the benefit received and the deductible charitable donation. Token benefits received by contributors do not reduce the amount of the charitable deduction, provided that the benefit is insubstantial in value.

Charitable gifts of $250 or more must be substantiated by contemporaneous written acknowledgment from the charitable organization. No substantiation is required if the organization files a return with the IRS reporting the information that is required to be included on the acknowledgment. Quid pro quo contributions in excess of $75
must also be disclosed by the donee organization.

Individual Limitations

The amount of the deduction for charitable contributions is limited to a percentage of adjusted gross income, calculated without regard to any net operating loss carryback. There are different percentage limitations depending on the type of property donated and the type of organization to which the property is donated.

The total of all charitable contributions deductible in any tax year cannot exceed 50% of an individual's adjusted gross income. Donations to 50% limit organizations may be used in full toward that limitation, except that donations of capital gain property to 50% limitation charities are subject to a 30% limitation.

Fifty percent charities include the following:

* Churches, synagogues, mosques, etc;

* Educational institutions;

* Hospitals or a hospital-affiliated medical research organization;

* Endowment foundations in connection with state colleges or universities;

* Government units, if the donation is made exclusively for public purposes;

* Organizations normally receiving a substantial part of their support from the public or a government unit;

* Private operating foundations;

* Private nonoperating foundations that distribute all contributions they receive to public charities and private operating foundations within 2As months after the end of their tax year;

* Organizations normally receiving more than one-third of their support in each tax year from the public in the form of contributions, grants, gifts, or membership fees and not more than one-third from gross investment income;

* Private foundations that pool all their contributions into a common fund and allow a substantial contributor to designate the recipient charity, income from the pool being distributed within
2 wQ months after the tax year in which it was realized and corpus attributable to any donor's contribution being distributed to a charity not later than one year after the death of the donor (or surviving spouse, if he or she has the right to designate the recipients of the corpus).

A 30% limit applies to contributions made to organizations other than 50% limit organizations. These include veterans' organizations, fraternal societies, nonprofit cemeteries, and certain private nonoperating foundations. Donations of capital gain property to these organizations are subject to a 20% limitation.

Individuals can carry over contributions that exceed the percentage limitations for up to five years. Contributions carried over are subject to the same percentage limitations in the year to which they are carried. Current year contributions in each category must be deducted before carryover contributions can be utilized. Carryover contributions in each category are utilized on a FIFO basis.

Documentation

Generally, if total noncash contributions exceed $500, Form 8283, Noncash Charitable Contributions, must be attached to the taxpayer's individual income tax return. Noncash contributions of $5,000 or less for one item and all contributions of publicly traded securities are reported in Section A of the form. Noncash contributions of more than $5,000 (except for publicly traded securities) are reported in Section B. To determine if the contribution exceeds $5,000, all similar items donated to charity during the year are combined. For example, $4,500 worth of books donated to Charity A and $2,000 worth of books donated to Charity B would be considered one item and would be in excess of $5,000; $2,000 worth of books donated to Charity A and $4,000 worth of clothing donated to Charity B would be considered two items, and would not be considered to be in excess of $5,000. A qualified appraisal must be obtained and a summary attached to the return for noncash contributions reported in Section B. *

Editor:
Edwin B. Morris, CPA
Rosenberg, Neuwirth & Kuchner

Contributing Editors:
Ira H. Inemer, CPA

Richard M. Barth, CPA

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.