Sample Tax Deductibility Handout for Auction Participants

Federal income tax issues associated charitable auctions.

This handout illustrates income tax points that can be included with materials provided to auction participants and their advisors. It can help prevent negative reactions resulting from common charitable auction misconceptions, while helping donors achieve desired benefits available from this type of fundraising.

Organizations can select questions they feel comfortable including with auction materials, and give the handout to participants as they arrive.

At the end of this article is a link to download this document as a Word file to make it easy to customize.

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Dear Friends,

In order to help inform you regarding federal income tax issues associated with a charitable auction, we are providing you with this information as a courtesy for educational purposes.

This is not legal or tax advice. Consult IRS resources or your tax advisor for additional information and personal guidance.

Q: May I claim a market value deduction for property that has appreciated in value and that I contribute for sale at a charitable auction?

The answer may depend on the type of property contributed, how you used the property, and how long you owned the property.

For most property contributed for auction sale, a tax deduction is typically limited to the lesser of the items’ current value or your tax basis, which is usually the amount you paid for the item if you acquired the property by purchase.

See IRS Publication 526, Charitable Contributions, or consult a tax professional regarding situations where appreciated property may be deductible at market value.

Q: May I claim a tax deduction for property I purchase at a charitable auction?

You may be able to claim a charitable income tax deduction for the excess of the amount you pay for an auction item over the item’s current market value.

But in order to claim a deduction, you must intend to make a donation, which is indicated by your awareness of the property’s value at the time you bid on the item. You may rely on an estimated value provided by the charity, unless you have reason to know this value is unreasonable.

In such case, you will need to document the value and the amount of any deduction by other reliable means.

Q: If I donate services for auction may I claim a tax deduction?

While greatly appreciated as a valuable gift for auction, unfortunately, the donation of services to a charity is never tax deductible.

Q: If I donate the use of a vacation home or other property for auction may I claim a tax deduction for the value of such use?

The donation of the use of property, including goods, equipment, and facilities is considered a donation of a partial interest in property that is not tax deductible.

Q: What do I need from the organization to document my donation of property for income taxes?

If you donate any single item of property with a value of $250 or more, you must obtain a written acknowledgment from the organization before filing your income tax return for the year of donation. The acknowledgment must include the following:

1. The name of the donee organization

1. A description of the donated property (but not the value)

1. One of the following:

• A statement that no goods or services were provided in return for the contribution

• A description and good faith estimate of the value of any goods and services provided in return for the contribution

• A statement that goods or services provided in return for the contribution were limited to intangible religious benefits

Q: Are there any special requirements for donations of higher value?

Yes. If the total deduction you claim for all non-cash charitable gifts made in a year is more than $500, you must file IRS Form 8283, Noncash Charitable Contributions, along with your income tax return.

Additionally, if you donate an item or group of similar items with a value of more than $5,000 you must obtain a qualified appraisal.

In this case, Form 8283 must be signed by the appraiser and the donee organization. You will need to complete part of the form before the donee acknowledgment section may be completed. See the Form 8283 instructions for more information, available at www.irs.gov.

Q: If I must have an appraisal, may I deduct the cost?

You may deduct the cost of an appraisal of property contributed to a charitable organization as a miscellaneous itemized deduction, subject to the 2% of adjusted gross income limit. However, the cost of an appraisal may not be deducted as a charitable contribution.

Q: Are there situations where it might be more beneficial to sell an item and donate the cash proceeds instead of donating the item for auction?

The following examples illustrate two common tax planning situations for donors of property that will be sold by the charity. The examples assume that the donors are otherwise able to itemize their deductions and can benefit from the full amount of their allowable charitable contributions.

Where a charitable deduction for appreciated property will be reduced by the amount of long-term capital gain that would be realized if sold, it may be preferable to sell the property and donate the after-tax proceeds.

This is true because under current law such income is taxed at a lower rate than ordinary income. The net proceeds can then be deducted at the donor’s higher marginal tax rate applicable to ordinary income. This may result in greater net tax savings and thereby reduce the cost of a gift to the donor

Example 1: Sarah is undecided whether to donate sports memorabilia with a current value of $2,000 to Favorite Charity for auction, or to sell the item and contribute the after-tax proceeds to Favorite Charity.

She purchased the item for $1,000 and has owned it for more than one year. For tax year 20XX, Sarah has a marginal federal income tax rate of 28%.

Accordingly, net capital gain income realized by Sarah in 20XX will be taxed at 15%. The following illustrates the cost of an outright gift to Favorite Charity versus sale of the item and donation of the after-tax proceeds.

Outright gift:
Value of property	$2,000
Tax deduction*	1,000
Tax savings from donation ($1,000 x 28%)	280
Net cost of gift ($2,000 – $280)	$1,720
Sale and gift of cash:
Proceeds of sale by Sarah	$2,000
Income tax on sale {($2,000 – $1,000) x 15%}	150
After-tax proceeds of sale	1,850
Tax savings from donation of proceeds ($1,850 x 28%)	518
Net cost of gift ($2,000 + $150 – $518)	$1,632

*Current value of property less long-term capital gain that would be realized if sold instead. This limitation results from the donation of tangible personal property put to an unrelated use by the charity (e.g. auction sale).

In situations where property held for business or for the production of investment income has decreased in value and would produce a tax deductible loss if sold instead, it may be preferable to sell the property and contribute the cash proceeds to the charity. In this way, the donor may receive a greater tax benefit as a result of deducting the full cost basis of the property upon sale.

Example 2: Joe is a dealer in art and his business income is taxed at individual rates. The market for a particular artist has been weak in recent years and he is considering contributing a painting by this artist from his inventory to Favorite Charity for auction.

He appreciates the work Favorite Charity does and is hopeful that the painting might fetch greater value at an auction sale.

Like Sarah, though, he is unsure whether outright donation or a sale followed by donation of the cash proceeds would make more sense.

Joe paid $10,000 for the painting and he feels he could sell it for $5,000 on the open market. Joe has a marginal income tax rate of 33%.

Outright gift:
Joe’s cost of painting	$10,000
Tax deduction**	5,000
Tax savings from donation ($5,000 x 33%)	1,650
Net cost of gift $10,000 – $1,650)	$8,350
Sale and gift of cash:
Proceeds of sale by Joe	$5,000
Tax savings from sale at loss {($5,000 – $10,000) * 33%}	1,650
Tax savings from donation of proceeds ($5,000 x 33%)	1,650
Net cost of gift ($10,000 – $1,650 – $1,650)	$6,700

**Limited to market value of $5,000.

If the fair market value of the painting had been more than Joe’s cost, his deduction would be reduced by the ordinary income that would result if sold instead, effectively limiting Joe’s deduction to his cost basis.

This rule applies to the donation of property that would result in ordinary income or short-term capital gain if sold at the time of contribution, such as business inventory or a capital asset held less than one year.

In both examples, the cost of the gift to the donor was reduced as a result of selling the property and contributing the net proceeds to the charity. Donors should evaluate each item of property individually. State and local income taxes should also be considered where applicable.

Of course, selling an item instead of donating it for auction would deprive the organization of the added income that would result in the case of an auction overbid. Donors should consider income tax issues along with their other charitable objectives in making such a decision.

• Download this article here: Tax Handout for Auction Participants