Friday April 26, 2024

4.5.2 Qualified Research Contributions

Qualified Research Contributions

The Charitable Deduction:  Generally, gifts of inventory are only deductible to the extent of the donor's cost basis, not fair market value.

Requirements:  Qualified research contributions are charitable gifts of tangible personal property by a C corporation to an educational institution or an organization operated primarily to conduct scientific research.

Educational Institution:  To qualify as an educational institution, an organization must be an institution of higher education that regularly admits students with a high school diploma or an equivalent.

The Charitable Deduction

Generally, gifts of inventory are only deductible to the extent of the donor's cost basis, not fair market value. However, there are a few exceptions to this general rule that apply only to C corporations.

The first exception is for qualified research contributions. If a gift qualifies under this exception, the deduction is still reduced below fair market value. However, the deduction is not reduced to cost basis as it is in the case of other inventory gifts. Sec. 170(e)(4)(B).

Instead, the deduction for a qualified research contribution is the lesser of (1) one half of the appreciation in the contributed asset plus cost basis or (2) twice the cost basis.

Example 4.5.2A

ABC Corporation, a maker of microscopes, donated 100 microscopes to the State University to be used in the biology research lab. The microscopes cost ABC $100 each to construct, for a total cost of $10,000. The microscopes have a fair market value of $500 each, or a total of $50,000. ABC's deduction for the gift is the lesser of cost basis plus one-half the appreciation or twice the cost basis. The appreciation of the microscopes is $40,000 ($50,000 - $10,000). One-half of $40,000, or $20,000, plus the $10,000 cost basis gives a deduction of $30,000. However, the deduction cannot be greater than twice the cost basis. ABC had a cost basis of $10,000. Twice the cost basis is $20,000. Therefore, the deduction to ABC Corporation is limited to $20,000.

Requirements

Qualified research contributions are charitable gifts of tangible personal property by a C corporation to an educational institution or an organization operated primarily to conduct scientific research.

The donor must have constructed the property for original use by the donee and the contribution must be no later than two years after the date of construction. The donor cannot receive any cash, property or services in return for the gift. The donor must receive a written statement that use and disposition of the property will be for research or experimentation and that no cash, goods or services were received in exchange for the property donated.

Educational Institution

To qualify as an educational institution, an organization must be an institution of higher education that regularly admits students with a high school diploma or an equivalent. The school must be legally authorized, within the state it is located, to provide a program of education beyond high school. Further, the school must provide an educational program for which it awards a bachelor's or higher degree or provides a program, which is acceptable for full credit towards such a degree. An organization will also qualify as an educational institution if it offers a program of training to prepare students for gainful employment in a recognized occupation. Lastly, the educational institution must be a public school or a nonprofit institution. Sec. 3304(f)

If the donee is not an educational institution the donor's gift may still qualify as a qualified research contribution if the organization is organized and operated primarily to conduct scientific research. The organization must also be described in Sec. 501(c)(3), exempt from income tax under Sec. 501(a) and not a private foundation.

If the donee organization is one of the two described above, and the following requirements are met, a donation of inventory from a C corporation qualifies for treatment and deduction as a qualified research contribution.

Case Studies on Qualified Research Contributions

Greenco Inventory Gift II: Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. When he was an infant, his parents immigrated to America. He attended high school and State College on the East Coast. After he received an engineering degree, Bill worked for two different companies on the East Coast. He met Clara, married and had two children, Susan and Harry.

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