With the end of a tax year just around the corner, the time is right to review opportunities to deduct charitable contributions. Consider the benefits of gifts of appreciated property. Generally, a gift of appreciated property (such as stock) to a qualified charitable organization is deductible to the extent of the fair market value of the property at the time of the gift. The appreciation in the property escapes tax.
Assume you wish to make a significant gift and you own stock that was acquired many years ago at a cost of $10,000, which is now worth $50,000. You could sell the stock and write a check to the organization for the amount of the after-tax proceeds, or you could make a gift of the stock itself. By selling the stock, you will have to pay 20% tax on the $40,000 capital gain which would equal $8000. Therefore, after paying the taxes you have $42,000 to give the charity and you will get a tax savings of $16,800 (40% of $42,000).
However, if you donate the stock at FMV of $50,000 the charity ends up with the full $50,000 and you get a tax saving of $20,000 (40% of $50,000). The net result is that the charity gets $8000 more, and you get the greater tax savings.
A bargain sale of appreciated property can also provide a tax benefit. The charitable deduction is determined as the difference between the selling price and the fair market value of the property. The taxable gain is determined by prorating the basis in the property between the portion “sold” and the portion “gifted.”
The deduction for contributions of appreciated property by an individual is limited to 30% of adjusted gross income for the year. Certain exceptions apply to the ability to deduct the fair market value of property. For example, a contribution of tangible personal property is deductible only to the extent of the taxpayer’s basis in the property unless the recipient uses the property in furtherance of its exempt purpose.
Deducting appreciated property can be a win-win and should be considered as a valuable tax-saving opportunity.
Accrual by C corporation. Accrual basis Subchapter C corporations may accelerate the deduction for contributions made after year-end. The board of directors must authorize the contribution during the tax year, and the payment must be made by March 15 of the following year for calendar year corporations. The tax return must include a declaration signed by a principal officer and a copy of the board resolution.