 Hello, and welcome to this session in which we will discuss itemized deduction, specifically charitable contribution, and this is part two of this series of discussion. In the prior session, we looked at charitable contribution in general, but basically an introduction. In this session, we would look at the type of property contributed and what type of a ceiling you will have on the contribution. Well the type of the property means whether it's at cash, is it something else other than cash? How do we value it? And as always, Congress is generous to a point. You can deduct charitable contribution up to a point. This is what we're going to be discussing in this session. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. Starting with types of contribution. What can you contribute? Well, you can contribute cash. That's easy. You can contribute ordinary income property, not long-term capital gain property. And this include inventory. This could include stocks and bonds. And you would include capital gain property. Again, capital gain property would include stocks and bonds because they could be capital gain, long-term capital gain. And they could include business asset, section 1231, which is real estate property used in business. Now when you contribute cash, what is the value? What's the value of cash? Cash is easy. Cash is cash. No need to value the cash. So when you contribute cash, it's real easy to value that amount. How about if you contribute ordinary income property, not long-term capital gain property? Well what is that? Well, that's asset that would produce ordinary income or short-term capital gain if sold. An example, inventory or another example, stocks or bonds. When you buy stocks and bonds and you sell them within one year, it will include short-term capital gain, which is ordinary income. So if those assets are contributed, how much can you deduct? What's your contribution amount? Well, here's what's going to happen. Generally speaking, you're going to have to take the lower of adjusted basis or fair market value if selling the asset to result in a short-term capital gain treated as ordinary income. Simply put, you would say the basis. The basis, unless the fair value is lower than the basis, then you will take the fair value because it's lower than the basis. But generally speaking, it's the basis. How about if you contributed capital gain property? What's capital gain property? Capital gain property would produce long-term capital gain. Like you have stocks and bonds, the same thing. However, you held them for longer than a year and if you sell them, they would result in a long-term capital gain. Therefore, they don't belong in this group. So the stock or bonds, they can belong as ordinary income property or capital gain depending on how long you held them. Well, if you held them long enough, they're in the third group. Or section 1231 gain, which is real estate depreciable property. How much can you contribute? How much can you deduct if you make this contribution? What's the contribution amount? Generally speaking, for this asset, you are allowed the fair market value unless we're going to discuss two exceptions. Now, obviously, fair market value is usually what we're assuming here. The fair market value is higher unless we have two exceptions we have to discuss. Let's take a look at this example. Alex donates stock in blue corporation to a college on September 1, X3. Alex purchased the stock for 4,000 on July 15, X3. And the stock had a value of 5,500. What you need to know is this. The first thing you need to know is this is a short-term transaction, short-term capital gain. The stock went up and it's short-term. It means it's going to result in ordinary income. As Alex did not hold the stock long enough to meet the long-term capital gain, selling the stock would result in a short-term capital gain of 1,500. Short-term capital gain means what? It's going to result in ordinary income. Short-term capital gain is treated as ordinary income property. So Alex's charitable contribution is limited to the basis, not fair value. Suppose the stock had a fair value of 3,000 instead of 5,500. So Alex bought the stock, the stock went down. Alex donated the stock after the stock went down. Then you are limited to your fair market value, which is lower than the basis. Otherwise it would be nice to buy a stock, goes down in value. You donate the stock and get the fair market value. Or the cost basis, which is higher than the fair market value. You know, that will be nice. So in other words, because the stock went down in value, you cannot use the basis. Now the fair market value will take place wide because it's slower than the basis. Let's look at the exception one, the fair market value deduction of capital gain property. Remember capital gain property was the third category and I said there are two exceptions. Because generally capital gain property is you could deduct the fair market value. We're assuming the fair market value is higher. Two exception, the first exception is this. The charitable deduction contribution of tangible property may be limited to the adjusted basis if not used for the charity's exempt function. Okay, what does that mean? Let's assume you donated, let's assume Oliver donated a painting that he purchased five years ago for $5,000. The fair market value of the painting at the time of the donation is $50,000. And Oliver decided to donate it to the Red Cross. Now the Red Cross, what are they going to do with this painting? There's not much they can do with it. Okay, they are going to sell it. So the donation is not for the intended use of the charity. Then under those circumstances, the contribution is the basis. So how much can Oliver deduct $5,000? Now what can Oliver do? Oliver can sell it, this can sell it, can sell it and donate the money. But if he sells it, he's going to be taxed on the profit as long term capital gain. Then whatever's left, then he can donate in cash and get the value in that. But the point is since it's not, you know, the Red Cross cannot use a painting. They're going to sell it. Now, if Oliver donated this to a local museum and the local museum put this painting on display, then Oliver can take the fair market value. Now how would Oliver know? The museum will tell them, will tell Oliver, this is what we're going to be doing. Now also the Red Cross is going to tell Oliver, look, we have no need of this. Thank you for your donation. We are going to sell it and use the proceeds for our cause. Then you will take the basis. The second exception, so this is again, the second exception where you cannot use the fair market value, assuming the fair market value is higher for capital gain contribution, which is category three. Property contributed to a private foundation may have certain limitation. What is a private foundation? Private foundation are organizations that typically don't rely on funding from the general public because we have private foundation, we have public as well. An example of private foundation, Bill and Melinda Gates Foundation. I'm not really sure if they're still together after the divorce, but I always use this example. Bill and Melinda Gates. Bill Gates is the founder of Microsoft, him and his wife, they have this foundation. It's a private foundation. Private foundation also are categorized under two categories, operating and what is operating? Private foundation, those foundation are active. They spend their money, significant portion of their income on active pursuit of charitable purposes. So if it's a private operating foundation, it means they are helping certain causes. Means they are contributing to the society. Non-operating foundation are different. Non-operating foundation, on the other hand, are not actively involved in charitable contribution, charitable activities. What they do is, for example, they want to maintain a certain park or a certain theater that's all what they focus on one thing. They're not helping the overall public and charity. They have a specific purpose, non-operating foundation. So when making a contribution to a private, non-operating foundation to this group here, the deduction might be reduced by the amount of potential long-term capital gain. As a result, the contribution is limited to the adjusted basis of the property. And we're assuming here that the adjusted basis is lower than the fair market value. So simply put, when you contribute to a private foundation that's non-operating foundation, you are what? You are limited to the basis. Again, we're assuming here the fair market value is greater than the basis. Example, five years ago, Maggie purchased a land for 10,000 and has held it as an investment since then. This year, when the land is worth 30,000, she decided to donate it to a private non-operating foundation. Maggie's charitable contribution is limited to $10,000 to her basis. Why? Because it's a non-operating foundation. If Maggie chooses to donate this land to a public charity or a private operating foundation, she would be able to deduct the fair market value of the land, which is $30,000. Also, there's always a contribution ceiling on donations. As I always mention, Congress is a generous to a point. Remember, what can we contribute? We can contribute cash. We can contribute ordinary income property. We can contribute long-term capital gain property. So we need to know how much you can deduct of each. If you are donating cash to public charities, because we have public charities and we have private charities and we have private and non-operating or operating and operating. So let's start with public charities. If you are donating to a public charity and public charities are called 50% organization, I'm going to tell you why they are called 50%. They are called 50% because if you contributed cash, you can deduct up to 50% of your adjusted gross income. Hold on a second. You just said 50%. Why is the X under 60%? Well, I'm going to tell you why. The Tax Cuts and Jobs Act of 2017, when that change was made, Congress says, look, since we are taken away some standard, some itemized deduction, let's increase how much people can contribute in charities. So we encourage them to contribute cash. So that's why it's 60%. But generally speaking, it's 50%. The ceiling is 50%. So the Tax Cuts and Jobs Act from 2018 to 2025 allows 60%. And that's why public charities and private operating charities are called 50% organization, 50% because the deduction was only 50%. But now it's 60% for the purpose of the Tax Cuts and Jobs Act. If you donate cash to a non-operating charities, again, those non-private, they don't help the public overall, then you are limited to 30%. You can contribute as much as you want to. That's not the point. The point is, how much can you deduct? You are limited to 30% of your adjusted gross income. Generally speaking, seldom people limit their cash contribution limit. How about if you contribute ordinary income property, remember, inventory, stocks you held for, stocks and bonds you held short-term? If you contribute this to a public charity, you are limited to 50% of your adjusted gross income. It's the basis, unless the basis is lower than the fair market value, you would use the fair market value. Two, private operating charities, the same thing, 50%. Those are, again, what are they called, 50% organization, 50% organization. Those are called 50% because the limit is 50%. Again, basis unless the fair market value is lower. How about if you contribute to a non-operating charities, it's going to be less, it's going to be 30%. So non-operating charities, what can we call them? We can call them 30% organization, 30% in contrast to the 50%. How about if you contributed long-term capital gain property? To a public charity, you are limited to 30%. To private non-operating charities, you are limited to 30%. And notice for non-operating charities, you are limited to 20%. So no, forget about this 30% thing. It's not really 30% because for capital gain, a contribution of long-term capital gain, you go down to 20%. The point is this, always remember that private non-operating charities, you are allowed less in all categories. For cash, 30% rather than 50%. For ordinary income, 30% rather than 50%. For contribution of long-term capital gain, 20% rather than 30% for the other organization. Again, fair market value of property, remember, unless the exceptions apply. How about, since we have ceiling, how about if you did not use the amount? If it's not used because you reached a limit, no worries. Contribution subject to limitation might be carried forward up to five years. When these carried forward, they maintain their original classification, whether it's 30% property or 50% property, they will maintain that. And when utilizing carryover, current contribution are utilized first, then followed by first and first out. So when you contribute this year, first you will deduct your contribution of this year. If you did not reach your limitation and you have some carryover, then you will start to use first and first out basis. Let's take a look at an example. And contribution and a tax year include both a 50% and a 30% property. The deduction is first taken from the 50% property before applying the 30% property. Because sometime you could be contributing two type of an asset, 50% property and a 30% property. Let's take a look at an example. Tax payer adjusted gross income is 60,000. And this individual contributed 2,000 in cash. And the land with a fair market value of 30,000. We're going to assume this land is long term. Potential total charitable contribution potential is 32, because we have the fair market value long term plus the 2,000. Now what we have to do, we have to compute the limit. The limit on the cash is 50% of AGI, which is 30,000. The limit on long term capital gain property is 30% of AGI, which is 18,000. So the current deduction of the land is limited to 18,000, not 30,000 because we are limited to that. The cash, it's fine, you can do it. The 2,000 is way less than the 30,000, right? So the amount of the deduction is the 2,000 cash, which is computed first plus the 18,000 for the land is 20,000. What we have is a contribution carry forward of 12,000 for the land. Because remember the fair market value was 30, we contributed 18,000 this year, what's left is 12,000. And this carry over will be a 30% asset carry over. Now, I am going to work additional simulations and exercises for this topic. And you can see those on my website. But what should you do now? Go to Farhat Lectures, look at MCQ's True Faults that's going to help you understand. This quasi-quasi complicated topic with many rules. Invest in yourself, charitable contribution, understanding schedule A. Itemized deduction is an important concept, whether you are a CPA candidate, an enrolled agent or accounting student. Good luck, study hard and of course, stay safe.