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If you donate property to a charity, the value of the donation is sometimes difficult to determine. Generally the value of the gift is the fair market value of the property at the time of the donation, but there are some exceptions to this rule.
If you're donating used clothing, furniture, household goods, toys, books, etc., the value of the gift is the same as you would pay in a thrift or consignment shop. You should keep an itemized list of the goods you donate and, if possible, get the charity's representative to stamp or sign it; at a minimum, they should give you a receipt for the goods you donate showing the name of the charity and date.
Similarly, if you're donating a car, boat, etc., you should determine the current fair market value, and get a receipt describing the item from the charity.
For donations made in 2005 and beyond, the American Jobs Creation Act of 2004 significantly increased the substantiation requirements for charitable contributions of most vehicles. Not only is donating a vehicle for tax purposes harder, it is also less rewarding for both the donor and the charity. To learn more about the pitfalls in this area, please review IRS Publication 4302, A Charity's Guide to Car Donations, and IRS Publication 4303, A Donor's Guide to Car Donations.
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Determining the value of donated property may be tricky because there are no fixed formulas or methods to rely on. To figure out how much you may deduct for your donation, take a look at the detailed instructions provided in IRS Publication 561, Determining the Value of Donated Property. Although additional resources may have to be consulted, this publication is a great place to start the valuation process.
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If you donate items from your inventory (for example, you're a restaurant owner and you donate the food for a charitable event) you can deduct the cost of the items to you, not their value.
If you donate property that has increased in value, the amount that you can deduct depends on whether, if you had sold the property, you would have realized ordinary gains or capital gains. For ordinary gains property (most property you held for a year or less, works of art you created, or inventory) you can deduct only the lower of fair market value at the time of the gift, or your basis in the property (which is generally your cost).
However, if the property would have resulted in capital gains if you had sold it, you can use the fair market value at the time of the gift. This includes stocks and bonds held for more than one year, real estate, and depreciable business property held for more than one year.
Documenting noncash gifts. For noncash contributions under $250, you need to get a receipt from the charity showing its name, the date, and a reasonably detailed description of the property. You also need to keep records showing the property's fair market value, and its cost if it has appreciated in value.
For noncash contributions of $250 to $500, you must get a written acknowledgement of your contribution from the charity, stating how much (if anything) you received in return for your gift.
If you made total noncash gifts over $500 for the year, you must complete and attach to your tax return IRS Form 8283, Noncash Charitable Contributions. If any single gift or group of similar gifts was valued at over $5,000, you must also get an appraisal of the item from a qualified appraiser. The cost of the appraisal itself is not a charitable contribution, but can be deducted as a miscellaneous deduction on Line 23 of Schedule A.
The American Jobs Creation Act of 2004 increased the reporting requirements for noncash charitable contributions made after June 3, 2004. For more details, please consult IRS Publication 526, Charitable Contributions.
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