Did you miss a tax deduction because you did not substantiate it correctly? Don’t feel bad, Joseph Mohamed lost a $20 million tax deduction for real estate that he donated to charities. You see, Joseph wanted to save a few bucks by preparing his own tax return, instead of giving it to a CPA. An important part of the return required Joseph to file a form for any property above $5,000. This form was to be signed by a certified independent appraiser.
Joseph not only did not sign the form, but decided to save even more money by appraising the property himself since he was a certified real estate appraiser. The overall savings of not using a CPA and an independent appraiser? Maybe about $2,000. The overall cost of not using a CPA and an independent appraiser? $20 million.
The IRS has various rules in donating non-cash items to a charity. These rule change whether the property is below $500, and above $5,000. You have to follow the rules exactly, or risk losing your deductions.
But just because you use an appraiser for $5,000 + property doesn’t mean that your appraisal would be accepted by the IRS. They may challenge the appraiser and bring in their own appraiser. I worked on a client years ago who seemed to satisfy all of the requirements for donating a Picasso. I made sure every step was satisfied in regards to the appraisal and valuation. What I didn’t know is that the appraiser he picked was the dealer he purchased the art piece from. The IRS questioned the appraiser’s objectivity and brought in their own appraiser who valued the piece much lower than the client’s appraiser.
As a CPA, I see all sorts of donations, so here are some tips:
- Take pictures of what you are donating
- Get a detailed receipt. If the organization will not itemize your receipt, type up a list of items and attached it to the paper. Make sure the receipt states language that you did not receive any goods or services in consideration for the donation.
- It is good practice to itemize what you are donating.
- If you are a business donating an inventory item, you will not be allowed the fair market value, just your inventory cost for the donation.
- The same goes for artists donating their art. You are allowed to donate only the value of what the art piece cost you to create, and that does not include your labor which cannot be valued for tax purposes.
Every situation is unique, so contact your tax advisor before making any decisions.
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