After ten years of contemplation, The Internal Revenue Service (IRS) issued final regulations related to the substantiation and reporting rules for cash and noncash gifts. The final rules are effective as of July 30, 2018, but in the case of noncash donations, the regulations apply to charitable contributions made on or after January 1, 2019. The IRS has long been wary of overvaluation of claimed philanthropic deductions, and these final regulations are an effort to curb abuses by taxpayers and their appraisers. These new final regulations apply to cash and noncash gifts made by individuals, partnerships, and corporations. A common form of a noncash gift is the contribution of an ownership interest in a privately held company, which has no readily available trading price.
The final regulations set out a range of requirements for cash gifts, but there are more burdensome requirements for noncash contributions of $5,000 or more. For these gifts, the donor must obtain a contemporaneously written receipt from the donee; the donor must receive a qualified appraisal and complete and file either Section A or Section B of Form 8283 (depending on the type of property contributed). For claimed noncash contributions of $500,000 or more, a donor must meet the requirements for a donation of $5,000 or more and attach the qualified appraisal to the filed tax return.
What’s Needed to Protect the Deductibility of a Noncash Gift?
- A “Qualified Appraisal” for noncash gifts of $5,000 or more
- Qualified Appraisal report must be prepared by a “Qualified Appraiser”
- The Qualified Appraisal report must be completed with appraisal standards that are consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (“USPAP”)
- The Qualified Appraisal must be signed and dated by the Qualified Appraiser no earlier than 60 days before the date of the contribution
- The valuation effective date must be no earlier than 60 days before the date for the contribution
As defined, a “Qualified Appraisal” is generally an appraisal report prepared by a Qualified Appraiser following generally accepted appraisal standards. The Qualified Appraisal report must include the following information about the gifted asset:
- The fair market value of the contributed property (fair market value is defined in Treasury Regulation Section 1.170A-1(c)(2))
- The effective date of the valuation opinion
- A detailed description of the asset valued
- Disclosure of any agreement or understanding related to the sale or disposition of the asset valued
- The date of the contribution by the donee
- A statement that the appraisal was prepared for income tax purposes
- A detailed description of the methods used to determine the fair market value of the contributed property
- The name, address, taxpayer identification number, qualifications, and signature of the appraiser issuing the fair market value opinion
Retaining an experienced appraiser following established reporting requirements issued by a recognized appraisal organization will ensure that all of the above requirements are included in a comprehensive appraisal report.
The regulations define in the final rules, a “Qualified Appraiser” is an individual with “verifiable education and experience in valuing the relevant type of property for which the appraisal is performed”. Verifiable education and experience mean the individual has successfully completed professional or college-level coursework in valuing the relevant type of property and has two or more years’ experience in valuing that type of property. The appraiser must complete coursework to demonstrate “verifiable education”. Attendance at a training event is not sufficient. A second, more stringent test may be met in satisfying the “Qualified Appraiser” definition. The appraiser who has earned a recognized appraiser designation for the type of property being valued will be considered to be a Qualified Appraiser in the eyes of the IRS.
Charitable contribution deductions for tax purposes can be a source of significant tax savings. To ensure that the deduction is valid and not disallowed by the IRS, care should be taken to meet all the requirements in the recently released gift substantiating and reporting regulations. Consulting tax professionals and experienced appraisers before gifting noncash assets, such as privately held business interests and real property, is a wise course of action. Our business valuation team is qualified to handle these types of appraisals and would welcome the opportunity to discuss further, contact me today to start the conversation.