How should you value donated property?
With less cash in people’s pockets, your nonprofit may see an increase in noncash donations. Whether you receive used computers, office furniture, a building or something else, the fair market value (FMV) of donated property needs to be recorded on your Form 990 and financial statements.
And if you received more than $25,000 in noncash contributions, or your organization received art, historical items or conservation easements, you must include “Schedule M — Noncash Contributions” with your 990. So how do you properly assess the FMV of the property as required by the IRS?
Define fair market value
The IRS defines FMV as the price that a willing knowledgeable buyer would pay a willing knowledgeable seller for the property, when neither has to buy or sell. For example, if a donor contributes used clothes, the FMV would be the price that typical buyers actually pay for clothes of the same age, condition, style and use.
Ultimately, FMV must consider all facts and circumstances connected with the property, such as its desirability, use and scarcity.
Consider the cost or selling price
According to the IRS, there are three particularly relevant factors that go into determining a gift’s FMV, and cost or selling price is one of them. The cost of the item to the donor or the actual selling price received by your organization may be the best indication of the item’s FMV. Because market conditions can change, though, the cost or price becomes less important the further in time the purchase or sale was from the date of contribution.
For instance, a donor may have paid $1,200 for a top-of-the-line smartphone in 2011. But that phone certainly isn’t worth $1,200 in 2013. It may still have some value, though.
A documented arm’s-length offer to buy the property — for example, real estate — close to the contribution date may help prove its value to the IRS. The offer must have been made by an independent, unrelated party willing and able to complete the transaction.
Look at comparable sales
The sales price of a property similar to the donated property — a comparable sale — often is critical in determining FMV. The weight that the IRS gives to a comparable sale depends on 1) the degree of similarity between the property sold and the donated property, 2) the time of the sale, 3) the circumstances of the sale (was it at arm’s length?), and 4) the market conditions.
The degree of similarity must be close enough that reasonably well-informed buyers or sellers of the donated property would have considered that selling price. It’s important that the transactions not be between related parties, and be considered arm’s-length sales. The greater the number of similar sales for comparable selling prices, the stronger the evidence of the FMV.
Determine replacement cost
FMV can consider the cost of buying, building or manufacturing property akin to the donated item, but the replacement cost must have a reasonable relationship with the FMV. And if the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important to its value.
Get an appraisal
When it comes to getting an appraisal of the donated property, potential donors might be deterred because of the hassle involved. Yet appraisals generally aren’t needed for items of property for which the donor will claim a deduction of $5,000 or less.
Donors who deduct more than $500 for any single item of clothing or any household item that’s not in “good used condition” or better must include a qualified appraisal with their income tax return. In these cases, the donor should understand that the IRS will weigh the appraisal based on the report’s completeness and the appraiser’s qualifications and demonstrated knowledge of the donated property. The agency requires appraisals to provide all facts applicable to giving an “intelligent judgment” of the property’s value, such as purchase price and comparable sales.
The IRS and courts are requiring donors to follow the requirements for appraisals — even when the value of the property is certain.
Do your duty
Properly valuing noncash gifts on financial statements and on Form 990 and its attachments is one of your organization’s financial reporting duties. For more information, see IRS Publication 561, Determining the Value of Donated Property. If you follow these IRS guidelines, you’ll find the process fairly straightforward.
Sidebar: Valuing inventory has its own rules for donors
Let’s say that your nonprofit needs several new computers, and a computer store is interested in donating some models to your organization as a “charitable donation.” Here’s how that would work:
If a business contributes inventory, it can deduct the smaller of its FMV on the day of the contribution or the inventory’s basis. (The basis of donated inventory is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution.) If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a “charitable deduction.” Instead, the cost would be included under “Cost of goods sold.”