If a donor suddenly offered your not-for-profit a residential property, antique jewelry or inventory from a business, would you know how to value it? Perhaps you don’t receive these types of contributions often, but you also don’t want to turn them down. If a property donation relates to your organization’s tax-exempt function, it’s generally valued based on its fair market value (FMV). But there are exceptions to this rule. Let’s take a look.
Open market price
FMV typically is defined as the price property would likely sell for on the open market. If, for example, a donor contributes used clothes for a charity to distribute to disaster victims, the FMV would be the price that typical buyers would pay for clothes of the same age, condition, style and use. However, if donated property is subject to any type of restriction on its use, the FMV must reflect it. Restrictions often are an issue with donated real estate. If, for instance, real estate isn’t eligible for commercial development, that may reduce its FMV.
If donated items are unrelated to your nonprofit’s exempt purpose and you plan to sell them, their value may also be different. In such cases, the deduction value is generally limited to the donor’s cost basis.
3 factors
There are three relevant FMV factors:
- Cost or selling price. This is the amount the donor paid for the item or the actual selling price received by your organization. But because market conditions can change, the cost or price becomes less important the further in time the purchase or sale is from the contribution date.
- Comparable sales. This is the sales price of property similar to the donated property. The IRS may give more or less weight to a comparable sale depending on the similarity between the property sold and the donated property, the time of the sale, the circumstances of the sale, and general market conditions.
- Replacement cost. FMV should consider the cost of buying or creating property similar to the donated item. However, the replacement cost must have a reasonable relationship with the FMV.
Note an exception: Businesses that donate inventory can usually deduct only the smaller of the inventory’s FMV on the day of the contribution or the inventory’s “basis.” The basis is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the donation. If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.
Also, for tangible property donations valued at more than $5,000, donors must obtain a written appraisal to deduct their gift on their tax return. Appraisers must be “qualified,” meaning they’re experts in the area of the property being evaluated and are independent of your organization.
Multiple uses
Valuing tangible property donations isn’t only important for donors’ charitable tax deductions. You’ll also need to assign accurate values in your nonprofit’s financial statements — and these values may sometimes be different from the amounts the donors are eligible to deduct. Visit our related service page for more information on our nonprofit services.
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