- The deduction of the charitable contribution has one opportunity for "double-dipping" in the tax code. This chance comes when contribute appreciated assets, such as investments, are donated to a recognized charity. By contributing an appreciated asset, you can deduct it in the same way as when you issue an organization's check at the current market value of that asset. The premium for contributing an appreciated asset, however, is that you will not have to pay capital gains tax on that asset. A deduction is obtained for the full market value without ever recognizing (and paying taxes) the profit. These are two benefits for the price of one very rare feast in the tax code.
- This special tax treatment is only available for assets that have long-term profit. Donations of assets that were held for a year or less (short-term gains) or assets that would generate a normal income (such as inventories) when sold are not subject to special tax treatment. The total value (deductions) resulting from donations of appreciated assets may not exceed 30 percent of AGI for a given year. Any deductions of appreciated assets that represent more than 30 percent of AGI could be carried forward for up to five years in the event of future deductions. After five years, the transfer disappears.
Grants of appreciated assets
Capital gains realized by the Foundation on the sale of appreciated assets are subject to a 1 or 2 percent tax on investment income. However, subsidies of appreciated assets transferred to charitable beneficiaries, are not subject to any tax and are not treated as sales. Besides, the amount of the subsidy of an appreciated asset is its a market value (or the value of sales) on the date of the award. So, to get a full market value deduction if you grant a valued property and avoid a 1 or 2 percent increase in value-added tax, you can consider donating the asset itself instead of selling the asset first and paying out the remaining cash after paying the tax. The beneficiary's ability to manage the sale of assets, usually transferable securities subject to a commission and variable daily value, should be taken into account .
Trapped-in capital gains discount
The concept of discounted capital gains tax is that a company with an appreciated asset would have to pay a capital gains tax on the sale of that asset. Had the owner of the company changed, the basis in the appreciated asset would not have changed. Therefore, the embedded tax liability for the sale of the asset would not disappear but will remain in the company under the new ownership .
In practice, some negative and positive factors can be assessed to determine the number of deferred tax assets. Positive factors (suggesting that the full amount of the deferred tax asset associated with the gross temporary difference should be recorded) may include :
- Surplus of appreciated asset values over their tax bases, in an amount sufficient to realize the deferred tax asset. This could be considered as a subset of the idea of tax strategies because the sale or sale/return of the appreciated property, is one of the quite obvious tax planning strategies to recover a deferred tax benefit that would otherwise expire unused.
- M.C. Murdock. 2013. p.313
- J. Blazek. 2018. p.195
- D.Laro,S.P.Pratt. 2011. p.250
- PKF International Ltd. 2015. p.787
- Blazek J. (2018), Tax planning and compliance for tax-exempt organizations: rules, checklists, procedures, Wiley & Sons Inc., New Jersey.
- Laro D., Pratt S. P., (2011), Business valuation and federal taxes: procedure, law and perspective, Wiley & Sons Inc., New Jersey.
- Murdock M.C. (2013), Tax insight: for tax year 2013 and beyond, Apress, New York.
- PKF International Ltd, (2015), Wiley IFRS 2015: interpretation and application of international financial reporting standards, Wiley & Sons Inc., New Jersey.
Author: Magdalena Domalik