Contributed by Sachin Gandhi, BG Advisors CPA
A taxpayer may claim a deduction for charitable contributions or gift of cash or property made to a qualified charitable organization during the tax year. The taxpayer generally deducts charitable contributions in the year which they are paid, regardless of when the contributions were pledged. An exception applies to this rule for accrual-based corporations.
Charitable contribution of appreciated property can increase the benefit to the taxpayer. Appreciated property is property that has a current fair market value that is higher than taxpayer basis in the property. In simple terms, basis is usually the original amount taxpayer paid for the property. However, special basis rules apply for inherited property, property acquired by gift, and property for which depreciation deductions are allowable, such as property used in a trade or business.
In general, taxpayer deduction for ordinary income property is limited to tax basis. For example, taxpayer bought stock two months ago for $10,000. It's now worth $12,000. An immediate contribution of the stock would give a deduction of $10,000, not $12,000. Now suppose taxpayer bought the stock more than one year ago for $10,000 and again contribute it when it's worth $12,000. Here, taxpayer normally would be able to deduct the entire $12,000. In either case, taxpayer would not be taxed on the $2,000 in appreciation. That is a far better result than if the taxpayer sold the stock, paid tax on the gain, and contributed the remaining proceeds to charity.
The charitable deduction is not allowed for contributions of future interests in tangible personal property until all intervening interests held by the donor and related persons cease to exist. A remainder interest in property transferred in trust to a charity is deductible only if the trust is a charitable remainder annuity trust, unitrust or pooled income fund, unless the remainder interest is the donor's entire interest.
No charitable contribution deduction is allowed where an organization is denied tax-exempt status due to violations of public policy, such as racial discrimination or to circumvent limitations lobbying activities.