Contributions are typically the most significant source of income for a church or ministry. In order to be a deductible expense for a tax payer the contribution must meet six requirements. Our post today will discuss the first requirement:
A contribution may be a donation of money or property. Cash contributions include currency, checks, credit cards, payroll deductions or out-of pocket expenses incurred when providing a service to the church. Property may include stock, inventory, buildings, vehicles, equipment, etc. The amount of the contribution is typically the fair market value of the property at the time of the contribution.
What is the fair market value? Fair value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell and both having reasonable knowledge of all the relevant facts. Quoted market prices, if available, are the best evidence of the fair value of monetary and nonmonetary assets, including services. If quoted market prices are not available, fair value may be estimated based on quoted market prices for similar assets, independent appraisals, or valuation techniques, such as the present value of estimated future cash flows.
For certain types of property consider the following:
a. Clothing and household items must be in good used condition or better. Household items include furniture, furnishings, electronics, appliances, linens and other similar items. The fair value for these types of donations can be determined based on what buyers would actually pay in a used clothing stores or thrift shops.
b. Qualified vehicles are defined as cars, boats and airplanes. These types of items are generally valued at the fair market value (from a third party publication or electronic data base – such as Kelly Blue Book) or the gross proceeds from the sale of the vehicle – which ever is lower. Donations of boats or airplanes require an appraisal from a third party knowledgeable of these assets. Condition or engine wear is critical in determining the value.
c. Stock is reported at the fair value at the time of the donation. Donor can potentially receive two benefits if the stock represents capital gain property. Capital gain property represents property that is owned for longer than 1 year. If donors contribute these types of stock, not only will they be able to deduct a charitable contribution, but they will also avoid paying a capital gains tax. In order for a contribution to be recognized before year-end, the stock must be “delivered” to the church or transferred to the church’s name by the issuing corporation.
If you have questions about other types of contributions, contact us. For further information, see the IRS publications 526 and 561.
See our next post related to qualified organizations, requirement #2.
