’Tis the season again: no, not holiday shopping season or even year-end tax planning season. It’s charity auction season, with all its possibilities for disposing unwanted treasures, potential bargains and tax confusion galore.
Donations to charity auctions can, generally, be divided into three categories: tangible personal property, services or the use of property.
Tangible Personal Property
Because objects donated for the auction won’t be used in the charity’s exempt activities, the deduction for the donor is limited to the lesser of the value of the object or the donor’s basis (generally, her cost).1 Unfortunately, this limitation doesn’t avoid the need to obtain an appraisal if the deduction will exceed $5,000.2 So, if the portrait of great-cousin Everett painted by a now-deceased artist is worth $25,000, but the cost was only $8,000, the deduction is limited to $8,000 and requires a detailed art appraisal to support it.3 The same portrait donated to a museum for its collection wouldn’t be limited to the cost: The full $25,000 would be allowed as a deduction, if supported by an appraisal.
For donations of services, the donor isn’t entitled to any deduction.4 However, out-of-pocket expenses related to performing the services are deductible. For example, a cleaning service that donates four hours of spring cleaning would be able to deduct the supplies related to the cleaning, but not the value of the time donated.
Use of Property
Donations of the use of vacation property and time shares seem to cause the most confusion. Although the auction catalog may value the use at several thousand dollars, no deduction is allowed for the value of the use of property.5 Since 1969, such donations have been considered to be a non-deductible partial interest in property. Again, any out-of-pocket expenses incurred in connection with the donation (for example, food baskets for the winning bidders, cleaning costs) are deductible.
In all cases, the usual rules regarding required acknowledgment letters apply. A letter is required for donations of $250 or more.6 Assuming the charity provides no goods or services in return for the auction donations, the acknowledgment letter must say so. It’s not sufficient for the letter to say “deductible to the full extent of the law.” The letter doesn’t need to value the donated goods or services, but it should describe what was donated. For out-of-pocket costs, it’s sufficient to acknowledge that the costs were incurred on behalf of the charity: The letter doesn’t need to detail the amounts.7 The donor should keep her own records of the costs.8
Whether the purchaser was fueled by a desire for the item itself, social rivalry or she was simply carried away with the mood of the evening, many a purchaser has examined her credit card receipt the next morning and wondered, “Is any of that deductible?” As with many good tax questions, the answer is “maybe.” If the purchaser paid more than the value of the item or service, then the difference is deductible as a cash contribution as long as the charity provides the appropriate acknowledgment letter (again, for deductions of $250 or more).9 Unless the purchaser has reason to know that the valuation is incorrect, she may rely on the auction catalog10 (less than $250 donation) or the acknowledgment letter ($250 or more). Sometimes, unique items are listed in charity auction catalogs as “priceless.” Given the availability of comparables for almost anything on Internet auction sites, even the purchase of “priceless” items can support a partial tax deduction if the charity reviews the similar items and issues the appropriate letter.
So enjoy the season: Donate happily, bid liberally and deduct carefully.
—This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.
1. Internal Revenue Code Section 170(e)(1)(B)(i)(I).
2. IRC Section 170(f)(11)(C).
3. Treasury Regulations Section 1.170A-13(c)(3).
4. Treas. Regs. Section 1.170A-1(g).
5. Treas. Regs. Section 1.170A-7(d) Ex. (1).
6. Treas. Regs. Section 1.170A-13(f).
7. Treas. Regs. Section 1.170A-13(f)(10).
8. Van Dusen v. Commissioner, 136 T.C. No. 25 (2011).
9. Treas. Regs. Section 1.170A-13(f)(2).
10. Treas. Regs. Section 1.170A-1(h)(4) and IRC Section 6115.