A 501(c)(3) refers to a section of the U.S. Internal Revenue Code that allows donors to nonprofit organizations established for certain purposes to deduct the value of their donations from their taxable income. Not all donations are deductible, though, and in some cases the value of a donation might not be obvious.
Donations of Cash and Goods
You can deduct the full value of cash donations to a 501(c)(3) as long as you received nothing of value in return. If you donate goods, you are typically entitled to deduct the fair market value of your donation. Some categories of property, such as automobiles and household appliances, are subject to special valuation rules. No matter how much you donate, you are never liable for gift tax on your donation.
You can't donate the value of time you spend doing volunteer work for a 501(c)(3). Likewise, you can't deduct the value of services that you provide, such as dental work. You can deduct out-of-pocket expenses if you were not reimbursed for them, though. One example of a deductible out-of-pocket expenses is mileage expenses when you use your car performing services to a 501(c)(3).
If you own corporate stock that has appreciated in value, selling it might cause you to realize a net capital gain for the year, triggering tax liability. If you donate the stock to a 501(c)(3) instead, you can avoid this tax liability and deduct the value of the stock at the time you donated it. If your stock has depreciated you can sell the stock, incur a capital loss and donate the proceeds to a 501(c)(3). In this way you can deduct the value of your donation and, if you incur a net capital loss for the year, deduct the value of your capital loss.
In most cases, you may deduct up to 50 percent of your adjusted gross income for donations to a 501(c)(3). Donations to veterans' organizations, fraternal societies, nonprofit cemeteries and certain charities that provide funds to other organizations rather than the general public are subject to a 30 percent limit. Gifts of property for the actual use of the organization rather than for raising cash or distribution to the public are subject to a 30 percent limit. Additionally, gifts of capital gain property such as corporate stock are subject to special limitations -- 30 percent if donated to 501(c)(3) organizations that would otherwise qualify for a 50 percent limit, and 20 percent for donations of property for the actual use of the organization.
- Better Business Bureau: Charity Tax Deductions
- SmartMoney: The Tax Perks of Charitable Giving
- Internal Revenue Service: Charitable Donations
- Universal Accounting: Three Smart Tax Moves For Donating Stock to Charity
- Moritz College of Law: The Application of the Gift Tax Provisions in the Internal Revenue Code to § 501(c)(4) Organizations
- gift image by Sergey Goruppa from Fotolia.com