Charitable Endeavors: Make sure your charitable donation counts for a tax deduction
At the end of each calendar year, it’s common for corporations and individuals alike to look for ways to maximize their tax deductions with charitable giving. Although making a charitable contribution may sound easy enough, it’s still important to do your research. What do corporations or individuals need to know to make sure they are following the law when taking charitable deductions? And how can they be sure their charity of choice qualifies and their donation is eligible to be deducted?
Scott Czaja, CPA and tax partner at accounting firm Wisam, Smith, Racker & Prescott, who also currently serves as treasurer for the Catholic Foundation of Utah and sits on the Utah Association of CPAs nonprofit steering committee, says there are a few big questions organizations and individuals must bear in mind before taking any deductions.
Choosing the best charity
Czaja says it’s important that whatever organization you plan on donating to is a valid, IRS-approved entity. “You should be giving your donations to a valid 501(c)(3) organization,” he says. “If you go the IRS’ website, they have an online tool you can use to put in the name of any charity and see if it qualifies.”
Most section 501(c)(3) organizations are charitable, educational or religious groups, which means not every nonprofit organization is a section 501(c)(3). And not every section allows charitable deductions. For example, social welfare and civic organizations registered under section 501(c)(4) don’t qualify.
Czaja adds that another local entity, the Utah Division of Consumer Protection, can also be a good resource for businesses and individuals who wish to make contributions. “Their job is to make sure during the giving season only bonafide charities who are registered with the state of Utah are able to get charitable contributions. They basically make sure non-registered and bogus charities are exposed and shut down.”
“If a business wanted to give a building away or wanted to give some land, there’s some amount of due diligence that has to be done to make sure the charity is not getting something like a toxic clean-up site,” Czaja says. “You can’t wait until the last minute to donate non-cash items and not expect charities to accept it without doing due diligence. Most big charities, like United Way or the LDS Church, have gift-screening processes in place, but the policy is if an organization gets something too late in the year, they have to go through due diligence before carte blanche accepting it.”
If a corporation is giving away something other than cash and it exceeds $5,000 in value, the item must be appraised beforehand. For example, if someone wanted to donate a car to an organization, the value of the car would have to be established before the donation was made, Czaja says.
“The IRS essentially forces donors to be realistic on valuations, so that when a charity receives a non-cash gift, like cars, property or artwork, and they decide to sell it, the charities are obligated to notify the IRS within a two-year window of receiving the gift to state what they sold it for. A lot of small charities aren’t aware of this rule.”
While volunteer hours may get your corporation a pat on the back, sweat equity is not eligible for a write-off. However, you can write off out-of-pocket expenses, such as what you pay for materials and supplies to assist with your volunteer work. In addition, the cost of driving to and from your volunteer site can be deducted at a rate of 14 cents per mile. If you take public transportation, that fare is also deductible.
Just because your corporation makes a pledge to make a monthly contribution to an organization doesn’t mean it counts. “With charitable giving, there’s one golden rule,” Czaja says. “You have to give it away. If you don’t intend to give it away and try to do something cute, that’s when you’ll get burned by the IRS.”
That means that if you agreed to give $100 a month to an organization during its annual fundraising drive, only the monthly payments you actually made during the year can be deducted on that year’s tax return.
“One way that you can semi-let go is through a donor-advised fund,” Czaja says. This type of fund is a separately identified fund that is maintained and operated by a section 501(c)(3) organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
“This way you can give your charitable deduction with very little pain by the end of the year and still have your fingers attached,” Czaja says. “In addition, these organizations already have a good status with the IRS.”