Tax Deduction for Not-for-Profit Donations

by David Carnes

    The Internal Revenue Service grants donors to certain nonprofit organizations the right to deduct the reasonable value of their donations from their taxable income. Pitfalls await taxpayers who attempt to write off their donations without understanding applicable restrictions, however. Non-cash donations are subject to special valuation rules, for example, and careful record-keeping is required.

    Not all nonprofit organizations qualify for tax-deductible donations. Most eligible organizations are dedicated to one of six primary purposes -- charitable, scientific, educational, religious, literary and the prevention of cruelty to animals. Other organizations such as hospitals, veterans' organizations and governments also are eligible. Even eligible organizations must submit Form 1023 to the IRS and receive approval as 501(c)(3) organizations before donations are tax-deductible. Churches are exempt from the approval rule -- they can accept tax-deductible donations without filing Form 1023.

    Donations of cash to a qualified nonprofit organization are, of course, fully deductible. The valuation of donations of property is more complicated, however. Special IRS valuation rules apply to certain classes of goods -- property subject to a debt, for example, and clothing. If no special rules apply, the property must be valued at its fair market value. If necessary, you should obtain an independent appraisal of the property's value. You can't deduct the value of services you provide or time spent performing these services. You can, however, deduct out-of pocket expenses you incur that are not reimbursed to you.

    When you sell corporate stock that has appreciated in value, you become liable for tax on your profit if your profit contributed to a net capital gain for the tax year. If you donate your stock to a qualified nonprofit instead of selling it, you can deduct the value of your stock at the time you donated it rather than at the time you bought it. Your donation also will release you from tax liability on your profit. If,, on the other hand, you own stock that has depreciated in value, you can sell the stock at a loss, donate the proceeds to a qualified nonprofit and deduct the amount of your donation. You also can claim a capital loss deduction from your taxable income if you incurred a net capital loss for the year.

    If you donate $250 or more to a single nonprofit during the tax year, the organization must provide you with a written acknowledgement. Although you don't have to submit it with your tax return, you should keep it in case of an IRS tax audit. You also should keep records of your donations of less than $250. To claim a deduction, complete Form 1040 and itemize your deductions on Schedule A. If you donated more than $500 in non-cash contributions during the tax year, you also must complete Form 8283.

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    About the Author

    David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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