There’s something about the end of the calendar year that encourages charitable giving. Whether it’s the holiday spirit (or spirits), the concept of the calendar year accounting period or a potential tax benefit, many donors find themselves motivated to make significant year-end gifts.
What should a donor think about before writing that check or donating other property?
First, is a check the most effective donation? It’s certainly convenient for both the donor and the charity. But, many donors would be better off in the long run donating appreciated property, especially marketable securities. Why? Well, assume a donor has stock she bought in 2010 worth $10,000 (with a cost basis of $6,000) and also $10,000 cash in the bank. She wants to make a charitable donation of $10,000. Strictly from a tax point of view, she should donate the stock and use the $10,000 cash to buy a new investment—even the same stock that was just donated. Now the donor has a charitable donation of $10,000 and new basis for the stock, which will save capital gains tax down the road.
What if the donor wants to make 10 $1,000 donations instead of one $10,000 donation? That’s a lot of paperwork to make 10 stock transfers of $1,000 each. But, the stock can still be an effective donation: The donor could use a donor-advised fund to donate the stock and then advise the fund to make 10 $1,000 grants. A few donors may have limitations on their charitable deductions based on their adjusted gross income, so they may have different considerations, since cash donations have a higher limitation than donations of appreciated property. Always run the numbers, or have a CPA do it, before making a choice between cash and other donations. Certainly, “loss” securities aren’t the most tax-effective choice for a donation, since a gift to charity doesn’t allow the loss to be recognized. Purely from a tax perspective, the recommendation is to sell the stock, deduct the loss and donate the cash.
What about personal property as a donation? If a donor has valuable property that a charity wants to use in its exempt function (think sculpture to an art museum), the donor is allowed a deduction for the appraised value of the property.1 But, if the property is donated for a different purpose (think sculpture for a charity auction), then the deduction is limited to the lesser of the donor’s cost basis or the appraised value.2 If the donated property has appreciated significantly, the deduction being limited to basis could lead to donor disappointment at tax time. Special rules apply to cars and other vehicles: If the charity accepts the vehicles just to sell them, the donor’s deduction equals the charity’s sales proceeds, so no appraisal is required.3
Timing is of the Essence
Year-end donations may be a challenge, depending on the type of asset to be donated. For checks, the mailbox rule applies: As long as the check is mailed before year-end, and it clears in the normal course of business, the deduction is allowed in the year of mailing.4 Stock transfers must be effective before year-end, which means that publicly traded stock must leave the donor’s brokerage account before year-end.5 Depending on the type of security, that transfer might be able to be initiated in the last days of the year, or it may need to be started weeks in advance. Mutual funds may require a several week lead time, especially if the charity doesn’t already have an account with the mutual fund. Closely held stock may be donated at the last minute, as long as the stock register is updated promptly.6 For closely held stock or partnership interests, the impediment to a year-end donation may be the charity’s need to perform due diligence before accepting the donation.
Delivery of tangible personal property to a charity must be effective to transfer ownership under state law for the deduction to be allowed. Donations of real estate are difficult last-minute gifts: Charities generally want to perform due diligence on the property for title and environmental issues before accepting it.
No matter what kind of property is donated, or when, donors need an acknowledgment letter referring to the date of the donation, the property donated and the value (if any) of benefits received by the donor. The requirement for an acknowledgment letter includes donations to one’s own private foundation. One item to watch for: When a check is in transit over year-end, the charity may accidentally date the receipt when it receives the check, rather than the mailing date. For most property valued at more than $5,000, other than cash or marketable securities, a qualified appraisal is required.7
Assuming the paperwork is in order, well-planned year-end giving can result in that warm holiday glow and a tax benefit besides.
—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).
3. IRC Section 170(f)(12).
4. Treasury Regulations Section 1.170A-1(b).
7. IRC Section 170(f)(11).