Recent Rulings Affecting the Deductibility of Charitable Contributions

10 min read

Years ago my wife, kids, and I would staff a Salvation Army kettle outside a Target store during the holiday season. In those days if you put money in the pot you got a deduction.  Now it is not as easy. This article explores some of the recent rulings that impact the deductibility of charitable contributions.

Final Regulations on Substantiation and Reporting Requirements (TD 9836)

For all cash donations, the taxpayer must keep a record of the gift. It must be either a bank record or written communication from the donee. For cash or noncash donations of $250 or more, the donor must obtain a written contemporaneous acknowledgment (CWA).

For noncash donations in excess of $5,000, the taxpayer must obtain a qualified appraisal. For noncash donations over $500,000, the qualified appraisal has to be attached to the return.

For all of the foregoing, Form 8283 must be properly completed where required.

Tax preparers need to make certain that before taking a deduction for noncash donations over $5,000 that the appraisal is qualified. This means that the person performing the appraisal is a “qualified appraiser”. A qualified appraiser is one who has verifiable education and experience in valuing the type of property being donated. A person is treated as having satisfied the education and experience requirement if they have either:

(A) Successfully completed professional or college-level coursework in valuing the type of property and have two or more years of experience in valuing the type of property, or (B) earned a recognized appraiser designation for the type of property.

The new requirements for appraisers apply to donations made after December 31, 2018.

The reasonable cause exception for a qualified appraisal has been eliminated in the final regulations.

Substantiation and the Shopping Grandmother (Grainger T.C. Memo 2018-117):

According to the court, the taxpayer is a retired grandmother who likes to shop. She combined her love of shopping with creating her own “personal tax shelter”. She claimed a noncash charitable deduction of $34,401. Most of the donations were clothes she bought at Talbots. She had a valuation problem in that she purchased the clothes at a discount but tried to write them off at full retail. But valuation is not the concern of this article; substantiation is.

Since all of the donated items were of similar property (clothing) they must be grouped together in determining whether the $5,000 substantiation threshold has been reached. This may be a big surprise to many accountants who think they only need to obtain an appraisal when a single donation exceeds $5,000. She did not have a qualified appraisal so the deduction was disallowed.

Another substantiation issue was the lack of detail on the receipts. She received receipts signed by the Goodwill employee that marked the date and location and the general types of items donated (clothing). She also supplied a spreadsheet she had prepared which the court said lacked any evidentiary value.

The court cited regulation 1.170A-13(b) which states in part that a description of the property is required “in detail reasonable under the circumstances”.

The court determined that she failed to secure a valid CWA. The receipts from Goodwill merely stated that she had donated clothing; they did not indicate what specific items of clothing she donated or the number of items donated on any particular visit.

Perhaps with the higher standard deduction provided by the TCJA we won’t see many noncash charitable donations. But for those clients who do want to claim a deduction we need to be mindful that each receipt must list out in detail the items donated, the items must be in at least good condition and finally, the appraisal threshold kicks in when the total of similar items donated during the year exceeds $5,000.

Proposed Regulations on Charitable Contributions and State and Local Tax Credits (IR-2018-172)

Some high income tax states have sought creative ways to help their taxpayers circumvent the $10,000 Schedule A cap on state and local property tax. One of the creative strategies is for the state to grant a tax credit for certain donations.

With one exception, this new regulation does away with this strategy. A taxpayer who makes an otherwise charitable contribution must reduce their charitable deduction by the amount of state or local tax credit they receive.

The taxpayer does not have to reduce the deduction if the state or local credit is no more than 15 percent of the donated amount.

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