Donating Appreciated Property to Charity

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The basics:

Several different tax rules may come into play in connection with such contributions. First of all, a charitable contribution of a work of art is subject to reduction if the charity’s use of the work of art is unrelated to the purpose or function that is the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you would have realized had you sold the property instead of giving it to charity.

Example (1). You bought a painting five years ago for $10,000 and it’s now worth $20,000. You contribute it to a hospital. Your deduction is limited to $10,000 because the hospital’s use of the painting is unrelated to its charitable function and you would have had a $10,000 long-term capital gain had you sold it.

Example (2). Now assume you donate the painting to an art museum. Here, your deduction is $20,000.

Substantiation requirements. One or more substantiation rules may come into play when you donate a work of art. First, if you claim a deduction of less than $250, you must get and keep a receipt from the donee organization and you must also keep reliable written records for each item property you contributed.

If you claim a deduction of at least $250, but not more than $500, then you must get and keep an acknowledgment of your contribution from the donee organization. The acknowledgment must state whether the organization gave you any goods or services in return for your contribution and include a description and good-faith estimate of the value of any goods or services given.

If you claim a deduction in excess of $500, but not over $5,000, then in addition to getting an acknowledgment, you must maintain written records that include information about how and when you obtained the property and its cost basis. You must also complete section A of Form 8283 and attach it to your tax return.

Where the claimed value of the property exceeds $5,000, then, in addition to an acknowledgment, you must also have a qualified appraisal of the property. This is an appraisal that was done by a qualified appraiser no more than 60 days before the contribution date and that meets numerous other requirements. You include information about these donations on section B of Form 8283, which you file with your tax return.

If your total deduction for art is $20,000 or more, you must attach a complete copy of the signed appraisal. If an item of art is valued at $20,000 or more, IRS may request that you provide a photograph. If an item of art has been appraised at $50,000 or more, you can ask IRS to issue a “Statement of Value” which can be used to substantiate the value.

Percentage limitations. In addition, your deduction may be limited to 20%, 30% or 50% of your contribution base, which usually is your adjusted gross income. The percentage varies depending on the type of organization involved and whether or not the deduction of the work of art had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.

Partial interest gifts. Donors sometimes make gifts of partial interests in an art work. For example, a donor may contribute a 50% interest in a painting to a museum, with the understanding that the museum will exhibit it for six months of the year and the donor will keep possession of it for the other six months.

Special requirements apply to these donations. The donee charity must take complete ownership of the item within 10 years or at the donor’s death, whichever comes first. Failure to comply results in the donor’s recapture of all charitable deductions claimed, plus interest and a 10% penalty. Also, the fair market value used in determining the amount of each later contribution can’t exceed the property’s value at the time of the initial contribution.

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If you want to talk to us about your personal tax situation, please email us via our contact page and visit our website at www.ablonco.com.

© 2019, all rights reserved.

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How to Account for Website Costs

These days, most businesses need a website to remain competitive. It’s an easy decision to set one up and maintain it. But determining the proper tax treatment for the costs involved in developing a website isn’t so easy.

That’s because the IRS hasn’t released any official guidance on these costs yet. Consequently, you must apply existing guidance on other costs to the issue of website development costs.

Hardware and software

First, let’s look at the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2019 is $2.55 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Software developed internally

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

Third party payments

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

Before business begins

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

We can help

We can determine the appropriate treatment for these costs for federal income tax purposes. Contact us if you have questions or want more information.

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If you want to talk to us about your personal tax situation, please email us via our contact page and visit our website at www.ablonco.com.

© 2019, all rights reserved.

 

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