December 9, 2024

‍

It is common knowledge that nonprofit organizations are funded primarily by donations. But donations do not always come in the form of cold, hard cash. Is your organization prepared for when a donor wants to give you valuable artwork? Is your leadership prepared to handle the gift of a house that comes via a will, trust, or similar bequest upon the death of a faithful member of your organization? While organizations generally do not want to say no to donations, they also need to consider that certain donations are not easily accepted.  

While donations of noncash assets may seem rare, your organization should expect the unexpected and prepare for the possibility of such donations by ensuring that the organization has the necessary policies and procedures in place to accept noncash gifts. If proper steps are not taken to ensure compliance with both your organization’s policies and IRS rules and regulations, a nonprofit organization that accepts noncash assets where charitable deductions are taken by the donor can lead to major headaches, unhappy donors, and even a loss of operating funds.

In this article, we will  

(1) give a general overview of the IRS rules regarding donation of noncash assets to a qualifying organization and when a charitable deduction can be taken;  

(2) review the compliance requirements that nonprofit organizations should consider when accepting noncash assets as donations; and  

(3) provide some recommendations for crafting a gift acceptance policy that provides your organization with a roadmap for how to properly accept noncash assets.

‍‍

1. When donors can obtain charitable deduction for contributions and of noncash assets.

First, it is important to understand the basics of how tax deductions can be obtained by a donor through charitable donations of noncash assets to tax-exempt organizations under federal law. The charitable contribution and deduction rules are highly fact-specific, but a general overview will be helpful.  

Noncash assets encompass a variety of different types of property, including:

        - real property (such as houses);

        - tangible personal property (any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars);

        - publicly traded securities;  

        - securities in privately held businesses;

        - intellectual property; and

        - cryptocurrency.

A donor can deduct contributions of noncash assets made only to “qualified organizations” under Internal Revenue Code § 170.¹ The general rule is that “a donor’s deduction for a contribution to an organization is limited to the fair market value of the contribution minus the fair market value of the goods and services the donor receives from the organization in exchange for the contribution.”² However, the amount of the deduction depends on a variety of factors, including  

        - whether the donor is giving property that has increased or decreased in value since the donor purchased it, and  

        - how long the donor has held the property prior to donation.  

Property that is being donated as a charitable contribution that has been held for longer than one year by the donor is called “Capital Gain Property,” while property held for less than one year by the donor is called “Ordinary Income Property.”³

a. Capital Gain Property

Generally, Capital Gain Property qualifies for a deduction of the full fair market value (“FMV”). However, there are many exceptions to the Capital Gain Property rule, including whether the donation is made to a private nonoperating foundation, or whether the donation was tangible personal property that was later sold within the same year (explained in more detail in Part 3 below).

b. Ordinary Income Property

In contrast, Ordinary Income Property is property that has been owned for one year or less by a donor. The rule for Ordinary Income Property is that if the FMV is more than the basis that the donor has in the property, the fair market value is reduced by the gain that would be otherwise realized if the property was sold, resulting in a charitable deduction for the donor of only the basis, or cost, for the property that was incurred by the donor. The IRS provides this example to illustrate the rule: “You donate stock you held for 5 months to your synagogue. The FMV of the stock on the day you donate it is $1,000, but you paid only $800 (your basis). Because the $200 of appreciation would be short-term capital gain if you sold the stock, your deduction is limited to $800 (FMV minus the appreciation).”⁴

2. Reception of noncash assets where a charitable deduction is taken

Nonprofit leadership must know what measures and steps they must take to comply with IRS rules related to acceptance of noncash gifts, especially where a charitable deduction is taken by the donor and if the organization plans to sell the noncash assets received.

a. Contemporaneous Written Acknowledgment Letter  

To start, the IRS requires that a nonprofit organization provide a contemporaneous written acknowledgment (“CCA”) letter to the donor describing the property contributed to the organization. This applies to all donations over $250, whether in the form of a cash or noncash donation. The IRS requires that the CCA letter contain very specific language, including whether any goods or services were provided in exchange for the donation. A recent Tax Court decision required strict compliance with this requirement.⁵ If the letter is not provided to the donor or the language is incorrect, the donation will not qualify for the charitable deduction.  

Note that the CCA letter cannot be issued after the filing of an individual’s tax return to cure the situation. Make sure to act swiftly and give the donor a copy of the acknowledgment letter as soon as possible after a donation is received, prior to the donor’s tax return being filed.

b. Receipt of Noncash Charitable Contributions - IRS Form 8283

With respect to noncash asset donations with a value over $500, the donor of such noncash contribution must submit IRS Form 8283 in order to claim a charitable deduction. Form 8283 provides specific information to the IRS regarding the donation. While most of the information in Form 8283 pertains to the donor, the organization receiving the donation must fill out and sign Part V of Form 8283, which requires the organization to acknowledge that  

        (1) it is a qualified organization under section 170(c),  

        (2) it received the donated property, and  

        (3) in the event the organization sells, exchanges, or otherwise disposes of the property within three years after the date of receipt of the donated assets, the organization will file Form 8282 with the IRS and give the donor a copy of Form         8282.

c. Qualified Written Appraisal Required

In tandem with the Form 8283 requirements, the IRS regulations require “qualified appraisals” for noncash assets valued over $5,000 where a donor is receiving a charitable deduction. This regulation is meant to curb abuses of claiming inflated charitable deductions that do not match the actual value of the noncash assets.⁶ Qualified appraisals are specific appraisals made in accordance with IRS regulations and must be made in a timely fashion - within 60 days of the date of a donation.⁷ Part IV of Form 8283 also includes a declaration from a qualified appraiser that the offered value of the noncash asset is accurate.  

3. Sale or disposition of recently received noncash assets.

After agreeing to receive a noncash contribution from a donor, a nonprofit organization’s leadership may decide that it wants to liquidate or otherwise dispose of the assets that it recently received. The general rule is that if such a decision to sell or otherwise dispose of the assets comes within three years of the organization receiving the charitable contribution and the claimed value of the charitable contribution was taken at a value of over $5,000, the organization will have to fill out and file IRS Form 8282 within 125 days of the date of sale or disposition of the contribution. The obligation to file Form 8282 also applies when transferring property from one tax-exempt organization to another.  

But tread carefully prior to any sale, as exceptions apply to sale of certain donated property that may change reporting requirements. In some instances, there is even the risk that charitable deductions previously claimed by a donor may be clawed back.  

For example, if a donor gives tangible personal property valued at over $5,000 and the claimed deduction was more than the basis, the donor must go back and report some or all of the previously claimed deduction amount as income if the organization  

(1) sells or otherwise disposes of the property within the three-year period that the tangible personal property was received, and  

(2) does not provide a written statement (such as on a relevant form such as Part IV of Form 8282) to the IRS that  

        (a) certifies its use of the property was substantial and related to the organization's purpose, or  

        (b) certifies its intended use of the property became impossible, depending on when the property was sold.⁸  

If such donated property is sold within the first year, the donor may only obtain as a charitable deduction the cost basis of the tangible personal property, rather than the FMV.⁹ If the tangible personal property was sold after one year but before three years, the donor must report as taxable income the difference between the basis and the claimed deduction.¹⁰

With complicated exceptions like these potentially in play, a tax-exempt organization should always have a plan for how it intends to use, sell, or otherwise dispose of noncash assets before receiving them from a donor. It is also a best practice to always consult an attorney or accountant prior to selling recently donated noncash assets.  

Takeaways For Your Nonprofit Organization’s Practices

Now that you understand the basics of how to handle the reception of noncash charitable donations, here are four key takeaways to protect your nonprofit organization’s interests and ensure compliance with applicable laws.

1. Adopt a Gift Acceptance Policy. The first and best course of action that your organization can do to protect itself in the future is to develop a gift acceptance policy. A gift acceptance policy adopted by the board of directors can provide guardrails for the leadership of your organization to determine what noncash gifts it will accept, what gifts it may accept depending on the facts and circumstances, and what gifts it will not accept in light of your organization’s exempt purposes (outlined in the Articles of Incorporation) and its specific circumstances. Your organization may decide that it does not want to accept real property at all. Or you may only want to accept shares of a privately held business if a donation agreement is in place. Or, because of your exempt purposes, you may only want to accept certain types of gifts. Talking with a lawyer to discuss the goals of your organization and how they are reflected in a gift acceptance policy can benefit your organization’s long-term stability.

2. Enter into a donation agreement for complex gifts. If your organization is considering receiving noncash donations that hinge on qualified appraisals or third-party approvals (such as donations of cryptocurrency or limited partnership interests), consider entering into a donation agreement with the donor prior to acceptance. A donation agreement can outline the exact intent of the donor and the exact contribution to the organization, as well as provide a corporate record of the responsibilities of both parties.

3. Ensure that the contemporaneous acknowledgment letter is sent. For any charitable contribution valued at more than $250, make sure that the contemporaneous acknowledgment letter is sent by the organization to the donor in a timely manner to avoid loss of deduction (and an unhappy donor).

4. Consult with legal counsel and accountants before accepting or selling/disposing of noncash gifts. Always look before you leap. If your organization has been offered a noncash asset of substantial value, consult with both your organization’s board of directors and legal counsel prior to accepting the gift. Creating a plan for noncash assets will help your organization avoid pitfalls in the long run (such as administrative complications and large compliance fees) and avoid noncash assets that could end up becoming poison pills to your organization.

‍

------------------------------------------

¹Qualified organizations include “churches, synagogues, temples, mosques, and other religious organizations;” as well as “nonprofit schools and hospitals”, but excludes some other tax-exempt organizations under 501(c)(3), such as testing for public safety organizations and private foundations. IRS Publication 526, at page 2.

² IRS Publication 1771, at page 4.

³Id.

⁴IRS Publication 526, at page 12.

⁵Albrecht v. Comm’r, T. C. Memo. 2022-53 (May 25, 2022).

⁶See, Marcum Accountants and Advisors, New IRS Regulations: What Constitutes A Qualified Appraisal? https://www.marcumllp.com/insights/new-irs-regulations-what-constitutes-a-qualified-appraisal (Aug. 24, 2018).

⁷Treas. Regs. § 1.170A-17(a)(4)

⁸IRS Publication 526, at page 13.

⁹IRC § 170(e)(1)(B)(i)

¹⁰IRC § 170(e)(7)(A)