By Frank Sommerville
When is an end-of-year gift tax deductible — and when it’s not?
Every December some member approaches the pastoral staff with the promise of a large gift. Since one of the donor’s main motives seems to be a tax deduction, this article will address the tax rules that govern whether the gift is tax deductible.
A tax deductible gift is an unconditional, complete transfer of property from a donor to a church. The church must assume control over the cash or property from the donor. While donors can designate a particular ministry or department within the church, the donor cannot designate the gift to any specific individual, including a staff member.
No foreign entity
The donor cannot require that the funds be paid to another tax-exempt organization. The donor cannot designate a foreign entity to receive the funds, including foreign religious organizations and churches.
The church must timely issue a receipt to the donor. For gifts of $250 or more, the receipt must identify the donor(s), church, date of the gift and, for cash gifts, the amount of the gift. Every receipt must state whether the donor received any goods or services in exchange for the gift. The donor must have the qualifying receipt in their possession when they file their tax return, usually April 15 each year.
If a noncash gift, the qualifying receipt must contain a detailed description of the item donated. If the value exceeds $500, the donor must file Form 8283 with his or her tax return. Except for nonpublicly traded stock, if the value of the gift exceeds $5,000, the church must sign the Form 8283 and a qualifying appraisal must be attached. Form 8382 is not a substitute for a qualifying receipt. If the church signed Form 8283, it must file Form 8282 if it disposes of the gifted property within three years of the gift.
Many donors give real estate because they can avoid income taxes that would arise if they sold the property. They may deduct the fair market value of the real estate. Sometimes the donor sells the real estate to the organization at a deeply discounted price. The donor realizes cash from the church and the church pays a reduced price. The difference between the appraised value and the actual cash paid is tax deductible. The organization must issue a qualifying receipt that does not report the dollar amount that is tax deductible. For example, the letter might state: “Thank you for the donation of 12 acres located at 123 Main Street. Other than the $250,000 paid to you, no goods or services were provided other than general intangible religious benefits.”
Another complication arises when a vendor seeks to apply the bargain sale rules to their goods or services. First, the donation of services is never tax deductible. Second, the donation of most tangible personal property is limited to the lower of the fair market value of the item or donor’s basis in the donated property. As a result, the vendor cannot use the bargain sale rules to create a tax deduction without recognizing income.
Frank Sommerville, JD, CPA, is a partner in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C., Dallas and Houston, TX. www.wkpz.org