Donating cash vs. assets to charity
Along about the end of the calendar year, businesses begin to consider ways to cut their taxes, and many businesses look at assets that are sitting around doing nothing. These assets might include:
- Out of date office equipment or furniture
- Obsolete (or not so obsolete) machinery
- Vehicles that are no longer being used
- And more.
If you have been thinking about donating some equipment or furniture to a charity, that's great. But before you turn over that assets, make sure you maximizing your tax benefit from the charitable donation.
Deducting donations to charity
First, look at whether you can take a tax deduction for giving to your local charity. In order to claim a tax deduction for donations,you must donate to a charity that is approved as a non-profit by the IRS. See IRS Publication 78 for a complete list of approved charities.
Before you make your decision on whether to donate an asset or to sell it and donate the cash, you must also
- Determine the original value of the asset when you purchased it. This value includes the cost of shipping the asset and setting it up.
- Estimate the current fair market value of the asset.
Appraising business property
For donations of business assets or property with a value greater than $250 you must be able to demonstrate that the fair market value is accurate. To determine the fair market value, you may need to get an appraisal from an independent appraiser.
Read more about tax deductions for charitable donations.
Consult your tax advisor
When you have determined the original value and current fair market value of an asset, consult your tax advisor before making the decision about whether to donate the asset or the cash proceeds from its sale. Several variables may affect the decision, including capital gains and the type of business you own. In general, there are some guidelines which might help you when making the decision about donating assets.
Donating cash vs. donating assets
Before you donate a business asset to a charity, consider whether it has increased or decreased in value.
- If the asset has appreciated (increased in value) since you purchased it, you will have a larger tax savings by donating the asset directly to the charity. Items like antiques and collectibles may have appreciated in value. If you sell the asset and give the proceeds to charity, the increase in value will likely produce a capital gain, which will result in increased taxes for you or your business. The charity will be able to sell or auction off the asset for a higher price, too.
- If the asset has depreciated (decreased in value) since you purchased it, it is usually better to sell the asset and take the loss, then donate the proceeds to a charity. If you donate the depreciated asset directly, you only receive the deduction for the decrease in value.
- If you are donating inventory, you must first establish the cost basis of the inventory, using LIFO, FIFO, or other means. You can deduct the fair market value or the tax basis, whichever is less.
- If you are donating property on which you have a mortgage, you must reduce the fair market value by the value of any interest that you paid (or will pay) after the contribution, so you can't claim the interest deduction and a charitable deduction on the same amount.
See this article by William Perez, Guide to Tax Planning,for more information on contributions of property.
In every case, whether you are donating cash or assets, you will need a letter from the charity acknowledging the donation. For cash donations, the letter should include the amount donated. For property or asset donations, the charity does not estimate value; you must be able to prove value with an appraisal or some other independent statement of value.
Disclaimer: Information in this article and on this GuideSite is not intended to be tax or legal advice, but is for general information purposes only. Every business tax situation is different; consult your tax advisor before making business decisions that can affect your business tax situation.