With the holiday season upon us, people may be thinking about making donations to their favorite charities. There are rules regarding the deductibility of those charitable contributions.
A transaction is not a charitable contribution unless the donor parts with something and the donee (charity) receives something. Generally, if the donor retains control over the property (including money), a right to its income, or the power to revoke the transfer, the transfer is incomplete. Likewise, if the donor receives something equivalent in value from the charity, no contribution has occurred. For example, a contribution to an educational institution, which in return agrees to allow the donor’s children to attend tuition-free, is not a deductible donation.
When property is donated, a deduction generally is available only if the entire interest in the property is irrevocably transferred.
A contribution is deductible for income tax if it is made to:
- the United States, a state, the District of Columbia, a U.S. possession and its political subdivisions or any political subdivision (e.g., a town or county), but only if the gift is made exclusively for public purposes;
- an entity organized within the United States (including a private foundation) which is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster amateur sports competition (but only if no part of its activities involves providing athletic equipment or facilities), or for the prevention of cruelty to children or animals;
- a war veterans’ organization or auxiliary organized in the United States;
- a domestic fraternal society (e.g., Shriners, Elks Lodges) if the gift is used exclusively for the purposes described in item b.;
- a cemetery company owned and operated exclusively for its members.
The IRS publishes a master list of qualified organizations in IRS Pub. 78, “Cumulative List of Organizations Described in Section 170(c)”. Publication 78 can be accessed via the IRS’s website at www.irs.gov. Taxpayers can also confirm an organization’s qualified status by calling the IRS at (877) 829-5500.
No deduction is allowed for contributions to organizations that engage in certain activities. Ineligible recipients include organizations with racially discriminatory policies, communist-controlled organizations, and organizations that attempt to influence legislation or participate in political campaigns.
No deduction is allowed for contributions or expenses if earmarked for a specific individual, even if made through a qualified organization. If a contribution is to be considered made to (or for the use of) a charity, rather than to a specific individual who ultimately benefits from the contribution, the charity must have full control over the use of the donated funds. The donor’s intent in making the contribution must have been to benefit the charity rather than the individual recipient.
A contribution is deductible only if the taxpayer has donative intent. Donative intent is generally evident if the donor transfers something to charity and receives nothing (or something of less value) in return. Other relevant factors include the nature and value of the donated property, the identities of the donor and charitable donee, and the donee’s intended use of the property. For example, the IRS would likely question a contribution to a private foundation providing scholarships that primarily benefit the donor’s family members.
Intangible benefits received by the donor, such as the satisfaction of seeing the gift used to benefit others, are ignored when determining whether the donor received something in return. A contribution that indirectly benefits the donor or the donor’s family is permissible. For example, a parent’s contribution to Girl Scouts is deductible even if the daughter is a member (assuming there is no arrangement to provide the daughter with benefits that are not provided to other Girl Scouts in a similar position).
The IRS recognizes that many charities raise funds by giving donors membership benefits (such as free admission to the organization’s facility, free parking, or discounts on purchases) or token items (e.g., key chains or T-shirts). Receiving these benefits does not indicate a lack of donative intent. However, the items received may reduce the amount of the donation.
When the donor receives something from the charity that is material compared to the value of the donation, the transaction may be questioned, especially if the donor and charity are related. If the donor receives value or benefits comparable to what was donated, he or she is treated as having purchased something, and no charitable deduction is allowed.
When a donor retains a substantial right or interest in the donated property, the donation is considered a partial interest. Generally, no deduction is allowed unless the donor transfers his or her entire interest in the property. Exceptions to this rule include a contribution of a remainder interest in a personal residence or farm, contributions to charitable remainder trusts, charitable lead trusts, pooled income funds, charitable gift annuities, and qualified conservation easement contributions.
A taxpayer may claim a charitable deduction for a partial interest if the transfer (not in trust) represents an undivided portion of his or her entire interest in the property. An undivided portion of a donor’s interest must consist of a fraction or percentage of each substantial interest or right the donor owns in the property. It must extend for the entire term of the donor’s interest and to any other property that may have been converted from the original property. Thus, if the taxpayer owns a partial interest in property and transfers that entire interest, the donation is deductible. However, if the taxpayer splits the interest in the property and transfers only a partial interest (and the gift is not one of the exceptions noted above, the gift is not deductible.
A contribution of the right to use property that the donor owns, e.g., a contribution of a rent-free lease, is treated as a contribution of a partial interest in property. A taxpayer who contributed a license to use a patent to a charity but retained the right, which was considered a substantial right, to license the patent to others was considered to have made a transfer of a partial interest, and thus, the charitable contribution was disallowed.
A charitable contribution is also considered a gift of a partial interest (and thus is not deductible) if the transfer can be negated by some future event, unless the possibility of that act or event is so remote as to be negligible.
No charitable deduction is allowed for a contribution of a fractional interest in an item of tangible personal property (such as artwork) unless all interests in the item were owned by the donor, or by the donor and the charity, immediately before the contribution.
A donor that places restrictions on a charity’s use of donated property runs the risk that a charitable deduction will be reduced, deferred or (depending upon the restriction) disallowed. If a gift is subject to a contingency, a charitable deduction is not allowed until the contingency is met.
A restriction on the use of donated property will affect the value of the gift. For example, the value of land gifted to charity with a stipulation that its use be limited to agricultural purposes must reflect the restriction. The value cannot be determined using the property’s highest and best use.
A charitable contribution is deductible for income tax purposes only if it meets certain criteria. A deductible contribution must consist of a voluntary transfer of money or property to an eligible recipient, without receipt of consideration or benefit, and in the proper form.
