Friday March 29, 2024

1.1.3 Deduction Limits - 60%, 50%, 30%, 20%

Percent Deduction Limits

Introduction:  There are several limits on deducting charitable gifts.

Cash to Public Charities:  The deductibility limit for public charities is 60% of the contribution base.

Appreciated Property to Public Charities:  Another common category of gift is long-term capital gain property.

The 50% Election for Appreciated Property:  This option is helpful for a donor who desires to make a large gift of appreciated stock that has a reasonably high basis.

Tangible Personal Property:  Tangible personal property (TPP) is typically a moveable asset.

Short-Term Capital Gain Property:  If a capital asset has not been held for the long-term holding period of one year and one day, then it is termed "short-term" capital gain property.

Gifts "For The Use Of" a Public Charity:  A public charity serves the public interest and is usually supported by a broad base of donors.

Conservation Easement Deductions - 50% and 15 Years:  Conservation easement deductions are permitted under Sec. 170 (f)(3)(B) if several tests are met.

Conservation Deductions for Farmers and Ranchers - 100% and 15 Years:  For qualified farmers and ranchers, the deduction is increased to 100% of the excess of the taxpayer's contribution base over the amount of all other allowable charitable contributions.

Gifts to Private Foundations:  A private foundation is frequently funded by members of one family and often is controlled by that family.

Cash Gifts to Private Foundations:  Gifts to private foundations are deducted only after the gifts each year to public charities.

Appreciated Property to Private Foundations:  Gifts of appreciated property to private foundations also are regulated more stringently than gifts to public charities.

C Corporations:  Different rules and limits apply to gifts by C corporations.

Gifts of Food Inventory:  C corporations making gifts of inventory to the ill, needy or infants qualify for an enhanced deduction.

Permanent Charitable Tax Extenders

In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.

The four permanent charitable provisions include the following:

1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.

2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.

3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.

4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.


Introduction


There are several limits on deducting charitable gifts. Generally, cash gifts and appreciated gifts to public charities are deducted first. Then, cash and appreciated gifts to private foundations are deducted. If there are carry-forwards in either category, those are deducted next if the current gifts have not reached the applicable deduction limits.

Cash to Public Charities


The deductibility limit for public charities is 60% of the contribution base. The contribution base is the Adjusted Gross Income (AGI), disregarding any net operating loss (NOL). Since very few taxpayers have an NOL, to simplify this discussion, the contribution base will be referred to as the AGI. Sec. 170(a).

A donor may give and deduct up to 60% of his or her AGI in one year. A gift of cash may be transferred and deducted in that year. If the donor gives more than the 60% limit, the excess is carried forward and may be deducted over the next five years. Reg. 1.170A-10(b).

Appreciated Property to Public Charities


Another common category of gift is long-term capital gain property. This property is a capital asset such as stock or land that has been held for at least a year and a day and therefore has long-term capital gain status. The full value of the asset is deductible, but the gift limit is 30% of donor's AGI. Sec. 170(b)(1)(C).

Gifts of cash and appreciated property may be combined, provided that the total gifts do not exceed 50% limits of the donor's AGI. At a future time, it is likely that a technical corrections bill or an IRS Revenue Ruling will permit combined cash and appreciated property gifts to be deductible at 60% of a donor's AGI. With combined gifts, the cash is deducted first and then the appreciated gift.

Editor's Note: In December 2018, the Joint Committee on Taxation (JCT) published a "Blue Book" (JCS-1-18) on the Tax Cuts and Jobs Act. The JCT Blue Book explanation suggests that Sec. 170(b)(1)(G)(iii) was not intended to change the prior 50% and 30% ordering. On page 51, "Coordination with certain other percentage limits applicable to individuals," JCT stated, "It is intended that any contribution of cash by an individual to an organization described in section 170(b)(1)(A) (generally, public charities and certain private foundations that are not nonoperating private foundations) shall be allowed to the extent that the aggregate of such contributions for the taxable year does not exceed 60 percent of the taxpayer's contribution base, reduced by the aggregate amount of the contributions allowed under section 170(b)(1)(A) for the year. In other words, the 60-percent limit for cash contributions is intended to be applied after (and reduced by) the amount of noncash contributions to organizations described in section 170(b)(1)(A)."

The prior 50% and 30% deductions are reported first, and up to 10% of additional cash deductions may be taken, for a potential total of 60%. Some CPAs may choose to rely on the JCT Blue Book and report Sec. 170(b)(1)(A) charitable gifts of cash and then appreciated property. To maximize tax savings through the capital gain bypass, the total gifts could be 20% cash and 30% appreciated property. If a CPA relies on the JCT ordering of Sec. 170(b)(1)(A) followed by the Sec. 170(b)(1)(G) gifts, then he or she will report an added 10% cash gift. Some CPAs may choose the 60% combination gift limit and some may hold with a 50% limit until a technical correction provision is passed.

Example 1.1.3A. Deduction Limits/Carry Forwards

Assume that donor has no NOL and $100,000 of AGI. Donor makes the following gifts:
  1. Donor gives $60,000 of cash. The full $60,000 is deductible this year.

  2. Donor gives $70,000 of cash. Since the 60% limit (60% x $100,000) is $60,000, the donor deducts $60,000 and carries forward $10,000.

  3. Donor gives $20,000 of cash and $30,000 of appreciated long-term capital gain stock. The donor deducts first the $20,000 cash and then the $30,000 of stock.

  4. Donor gives $40,000 of cash and $30,000 of stock. The donor first deducts $40,000 of cash and then $10,000 of stock. Since the donor has now reached her 50% limit ($50,000), the additional $20,000 stock gift is carried forward and may be deducted in any of the next five years. The deduction of course will be permitted only if the donor has not reached the 30% limit with her current gifts in that future year.

  5. Donor gives $10,000 of cash and $100,000 of appreciated stock. The donor deducts first the $10,000 of cash and then $30,000 of stock. The donor carries forward $70,000 of stock as an appreciated property type of gift. While the $40,000 deduction for that year was less than the 50% limit, the donor had reached the 30% limit for the stock gift and thus had to carry forward the $70,000.

The 50% Election For Appreciated Property


This option is helpful for a donor who desires to make a large gift of appreciated stock that has a reasonably high basis. The donor may elect to deduct the cost basis and not the fair market value. If a donor with AGI of $100,000 owns stock with basis of $50,000 and fair market value of $60,000, he or she might choose to give the stock and deduct the basis. If the donor chooses to deduct the $60,000 fair market value, then the gift will be an appreciated property gift and limited to 30% of the donor's AGI or $30,000 per year. However, by reducing the deduction to the $50,000 cost basis, the donor is permitted to deduct the basis and apply the gift to the 50% limit. Thus, the donor could deduct the full $50,000 in the year of the gift. Sec. 170(b)(1)(C)(iii). However, if the donor elects to deduct the cost basis, then all appreciated property gifts and carry forwards from prior years also must be treated as deductible at cost basis. Reg. 1.170A-8(d)(2)(i).

Tangible Personal Property


Tangible personal property (TPP) is typically a moveable asset. TPP includes vehicles, art, non-monetary coins, collectibles and similar property. If TPP is given to a charity and the charity uses it in a manner related to the charity's exempt purpose, then the property may be deducted at fair market value. Sec. 170(e)(1)(B). For example, a gift of art to an art museum is a gift of TPP that may be used by the art museum in a way related to its exempt purpose.

However, if a person gives a collection of rare books to the art museum and the art museum then sells the books within three years, the gift of TPP is for an unrelated use. The donor will receive a deduction only for his or her cost basis in the books. Reg. 1.170A-4(b). If the gift of tangible personal property is for a related use, then the fair market value may be deducted as a 30% type gift. However, if the gift is for an unrelated use, only the cost basis is deductible, but it is a 50% type gift.

Short-Term Capital Gain Property


If a capital asset has not been held for the long-term holding period of one year and one day, then it is termed "short-term" capital gain property. Giving short-term capital gain property to a charity produces a cost basis deduction. Because the deduction is reduced to cost basis, this is a 50% type gift.

Gifts "For The Use Of" a Public Charity


A public charity serves the public interest and is usually supported by a broad base of donors. Some gifts are made in trust for the benefit of a charity, and not directly to the charity. If a gift is made "for the use of" a public charity, then it is deductible, but the 30% limit must be followed.

The "for the use of" rule applies whether the gift is of cash or appreciated property. Sec. 170(c). For example, a cash contribution to a grantor charitable lead trust is limited to 30% of AGI because the gift is deemed to be "for the use of" the charity.

Conservation Easement Deductions - 50% and 15 Years


Conservation easement deductions are permitted under Sec. 170 (f)(3)(B) if several tests are met. First, the conservation easement must be a real property interest, usually a restriction granted in perpetuity concerning the use of the property. Second, the recipient must be a "qualified organization." Third, the gift must be made "exclusively for conservation purposes." Fourth, for a historic area home easement deduction, the entire exterior must be preserved and any changes in the front, sides or rear "inconsistent with the historical character" are prohibited.

Normally, appreciated property deductions are limited to 30% of AGI, with a carry forward deduction usable for up to five years. However, Sec. 170(b)(1)(E) permits deductions for qualified conservation easements to qualify for the more generous 50% of AGI contribution level, with a potential carry-forward of up to 15 years.

The deduction must be supported by a qualified appraisal. An independent professional appraiser with appropriate credentials and experience in conservation easements must value the gift. Sec. 170(f)(11)(E).

If the gift is a home in an historic district, all four sides of the building must be preserved. Sec. 170(h)(4)(B)(i). In that case, the appraisal must include photos of the four sides of the home, a $500 fee and an agreement with a qualified conservation charity. The appraisal must be submitted with the tax return. The agreement must state under oath that the conservation charity is qualified to receive the easement and has the resources and commitment to enforce the agreement. Sec. 170(h)(4)(B)(ii).

Conservation Deductions For Farmers and Ranchers - 100% and 15 Years


For qualified farmers and ranchers, the deduction is increased to 100% of the excess of the taxpayer's contribution base over the amount of all other allowable charitable contributions. The excess may also be carried forward for 15 years. Sec. 170(b)(1)(E)(iv)(I). The qualified farmer or rancher must receive more than 50% of his or her gross income (as defined in Sec. 2032A(e)(5)) from ranching or farming activity, and the land must remain available for agricultural or livestock production. Sec. 170(b)(1)(E)(iv)(II).

Example 1.1.3B Ranch 100% Deduction

Jane Rancher has a contribution base of $100,000 and makes a qualified ranch conservation easement gift of $80,000 this year. She also gives cash of $70,000 to public charities. Jane may deduct 60% or $60,000 of the cash gift, and will carry forward $10,000 of the cash gift for up to five years. The $80,000 conservation gift qualifies for a $50,000 gift this year (the difference between the 50% deducted and 100% of the contribution base) and the $30,000 balance of the conservation gift may be carried forward for up to 15 years.

In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher, for the taxable year in which the contribution is made, any qualified conservation contribution is allowable up to 100% of the excess of the corporation's taxable income (as computed under Sec. 170(b)(2) over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100% limitation.

Gifts to Private Foundations


A private foundation is frequently funded by members of one family and often is controlled by that family. Because the private foundation is less favored under the laws than a public charity, the deduction limits are lower.

Cash Gifts to Private Foundations


Gifts to private foundations are deducted only after the gifts each year to public charities. Sec. 170(b)(1)(B). The gift of cash to a private foundation is limited to the lesser of 30% of AGI or the remaining gift portion of the 60% total gifts that may be deducted in one year. If a donor with $100,000 of AGI gives more than $30,000 to public charities, then there may be less than the $30,000 deduction limit potentially available for gifts to a private foundation.

Appreciated Property to Private Foundations


Gifts of appreciated property to private foundations also are regulated more stringently than gifts to public charities. If the asset is stock in a family business or land, then the deduction is limited to cost basis. However, if the donor gives publicly traded stock to a private foundation, the donor may receive a deduction for the fair market value of the property gifted. Sec. 170(e). In any case, the gift to a private foundation of appreciated property is limited to 20% of AGI. Sec. 170(b)(1)(D). If the gift exceeds the 20% limit, the excess may be carried forward for up to five years. Sec. 170(b)(1)(B)(ii).

Example 1.1.3C Deduction Order

The deduction order for most donors is fairly straightforward. He or she deducts cash gifts first and then appreciated gifts to the 50% and 30% limits. However, it is possible that the deduction order could be fairly sophisticated. Deduction order as a percent of contribution base could be as follows:
  1. Cash gifts to 60% AGI limit.
  2. Appreciated gifts elected to be deducted at cost basis to 50% limit.
  3. Unrelated use tangible personal property deducted at cost basis to 50% limit.
  4. Short-term capital gain deducted at cost basis to 50% limit.
  5. Appreciated stock or land deducted at fair market value to 30% limit.
  6. Gifts "for the use of" a charity deducted to 30% limit.
  7. Cash to private foundation deducted at 30% limit.
  8. Public stock to private foundation deducted at fair market value to 20% limit.
  9. Land or private stock to private foundation at cost basis to 20% limit.
  10. Carry forwards of 60% limit gifts.
  11. Carry forwards of 30% limit cash gifts to private foundations.
  12. Carry forwards of 30% appreciated property gifts to public foundations.
  13. Carry forwards of 20% limit gifts to private foundations.
While the list can be lengthy, for donors who give only to public charities, the rules are reasonably straightforward. Cash gifts are deducted first. Appreciated gifts are deducted next. If there is an available 50% or 30% limit, then carry forwards of cash and appreciated property are deducted in order, with the oldest carry-forward gifts deducted first.

C Corporations


Different rules and limits apply to gifts by C corporations. A C corporation is taxed on its income and is permitted to take a charitable deduction up to 10% of taxable income. Sec. 170(b)(2). Gifts in excess of that amount may be carried forward and deducted over the five succeeding years. Reg. 1.170A-11(c). In addition, if the corporation uses the accrual method of accounting and has authorized a gift by year-end, the gift may be made within the next two and one half months and still deducted in the prior year. Reg. 1.170A-11(b).

Gifts of Food Inventory


C corporations making gifts of inventory to the ill, needy or infants qualify for an enhanced deduction. The amount equals the lesser of cost basis plus one-half the item's appreciation or twice the basis. Sec. 170 (3)(c). In general, a C corporation's charitable contribution deductions for a year may not exceed 10% of the corporation's taxable income. Sec. 170(b)(2). To be eligible for the enhanced deduction, the contributed property generally must be inventory of the taxpayer, contributed to a charitable organization described in Sec. 501(c)(3) (except for private nonoperating foundations) and the donee must (1) use the property consistent with the donee's exempt purpose solely for the care of the ill, the needy or infants, (2) not transfer the property in exchange for money, other property or services, and (3) provide the taxpayer a written statement that the donee's use of the property will be consistent with such requirements.

Any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim the enhanced deduction up to 15% of entity net income for contributions of "apparently wholesome food." "Apparently wholesome food" is defined as food intended for human consumption that meets all quality and labeling standards imposed by law and regulations even though the food may not be readily marketable. Sec. 170(e)(3)(C).

Farmers and ranchers are an exception to the 15% deduction limit rule. If a qualified farmer or rancher (50% or more of income from farming or ranching) makes gifts of "apparently wholesome food," up to 100% of adjusted gross income may be offset by the value of these food gifts.

Case Studies on Deduction Limits - 60%, 50%, 30%, 20%

Electing the 50% AGI Limitation for Gifts of Appreciated Stock:   Barry Lokken, 60, was a retired architect. He spent his leisure days playing golf and the stock market. Barry's success in the stock market during the past five years has been very rewarding.

The Philandering Philanthropist, Part 4 of 4 - Gift of Closely Held C Corporation Stock:   John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women.


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