BY GREG MERMEL, C.P.A.
Ancient wisdom can be amazingly contemporary. St. Matthew aptly describes
the symmetrical position of many in the arts. Our non-profit theatres
thrive (or barely scrape by) through the generosity of others, but we
tend to give generously as well. We give our money, we give our time,
we give our "stuff." And sometimes, this bread cast upon the
waters is returned to us as tax savings.
Giving Our Money
Not all charitable contributions are deductible, though the exceptions tend to be esoteric. Your charitable deduction is limited to half your income for that year (though any excess carries over to later years). You cannot deduct contributions to a foreign charity (though most larger ones have U.S. affiliates, like Oxfam America). And you cannot deduct a contribution made to, or specifically designated for, an individual–no matter how deserving.
A much more common situation is being able to deduct the contribution, but getting no tax savings as a result of the deduction. For individuals, charitable contributions are deductible only as part of their itemized deductions; the other major types of itemized deductions are home mortgage interest, real estate taxes, state and local income taxes, medical expenses above 7.5 percent of your income, and certain business expenses above two percent of your income. If the standard deduction (currently $4,550 for single taxpayers and $7,600 for married couples) is more than your itemized deductions, those itemized deductions save you nothing. This means that only the relatively prosperous (typically, those who can afford to buy a home) receive any tax benefit.
Then, too, the progressive structure of U.S. tax rates means that the wealthier get a bigger tax savings: $100 of charitable contributions may save $40 in tax for a high-income person, but only $15 for a moderate-income worker. Depending on your viewpoint, this is either an appropriate means of encouraging those most able to contribute to do so more generously or an outrageous tax break for the rich.
At various brief times in the past, special deductions or credits for charitable contributions have been available to taxpayers who do not otherwise have significant itemized deductions. That idea seems to be coming back, as variations on it have passed both the House and Senate. If a special deduction or credit is enacted, it will be a face-saving measure, covering the last tattered remains of President Bush’s "Faith-Based Initiative." That is ironic, because Bush’s original proposal would have shoveled government money directly to religious groups chosen by the government. A contribution deduction is exactly the opposite, a back-door way of letting individual taxpayers determine what charities the government will subsidize. Of course, they cannot provide a benefit for giving to a right-wing fundamentalist church without equally providing one for giving to a left-wing theatre company.
Giving of Ourselves
People in the arts also tend to give generously of their time and talents, often because they have far more of that available than money. All too often, these kind folks are disappointed when I tell them they cannot take a tax deduction for the value of their services. With one important exception, tax law limits the deduction for a charitable contribution to the lower of two amounts: what it’s worth (fair market value) or what it cost (properly called the taxpayer’s basis). Your creative skills may be valuable, but in actual money terms, they cost you nothing. You can deduct your automobile usage and other out-of-pocket expenses. In many cases, however, these are buried among the similar deductible expenses you incurred for business and reclassifying them saves you nothing.
Contribution of services is one area where the tax rules are asymmetrical. For financial reporting purposes, nonprofit organizations are required to recognize in-kind contributions if certain criteria are met: The services must either create or enhance a non-financial asset (such as designing your new theatre) or require specialized skills that would typically need to be purchased if not contributed (like lawyers). These are accounting rules, not tax rules, but the Internal Revenue Service allows (but does not require) nonprofit organizations to follow them in their tax reporting.
Giving Our Stuff
A contribution need not be made in money to be deductible. Whether it’s the unused ticket you turn back at Lyric Opera, or the bags of old clothing, you can deduct the lower of what it is worth or what it cost you. For the opera ticket, they are the same: Lyric will resell it for face value. For the old clothes, they are clearly worth less than you had paid for them, and you should base your deduction on how the thrift store will price them.
The big exception to that restriction involves stock and other securities that have gone up in value–if anybody still has any. Instead of selling the stock (incurring tax on the capital gain) and donating the proceeds, the donor can give the stock to a charity (which will almost always sell it). The donor gets to deduct the fair market value of the gift, and avoids paying any tax on the gain.
Many in-kind contributions are tricky to value: used clothes, of course, but also used cars, works of art, rare books and the like. Tax law absolutely prohibits the recipient organization from putting a value on the gift for the donor’s use in taking a tax deduction, even though they may have to do so for financial reporting purposes. Some thrift stores tiptoe around this by providing a list of how they usually price commonly-contributed items. Except for publicly-traded securities, gifts valued at more than $5,000 require a certified appraisal, and the charity cannot even pay for that. These restrictions are actually there to protect the charities; they can’t be coerced by a donor into assisting in tax fraud. And if you think they are not needed, remember this: They were put into place after a former President of the United States (the one who assured us, "I am not a crook") tried to do exactly that.
Ask and Ye Shall Receive
Continuing the theme, I will be pleased to donate the cost of paper, labor and postage to send you a free copy of my "Checklist of Potentially Deductible Items" for those in the arts. Just call or write my office, and we will send you one.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area).
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers.