“Related use” in charitable gifts of tangible personal property
Tangible personal property is a fancy way of saying “stuff,” such as a painting. So, when you give stuff to your favorite charity, what are the tax consequences?
The amount of your federal income tax charitable deduction depends on the concept of “related use.” If appreciated tangible personal property is considered related to the charity’s exempt purpose, the deduction is based on fair market value (FMV) and available to the extent of 30% of your adjusted gross income (AGI). If property is considered unrelated to the public charity’s exempt purpose, the deduction is based on the lesser of its FMV and its cost basis, and is available to the extent of 50% of your AGI.
In sum, in order for a donor of tangible personal property to be able to deduct its full FMV, the charity must use the object in a manner that is related to its (the charity’s) exempt purpose. A classic example is the gift of a painting to an art museum.
This concept of “related use” can have very profound tax consequences. For instance, assume Jill Donor owns a painting which is now worth $100,000, but Donor purchased it for only $20,000.
If Donor gives this painting to an art museum that keeps and displays the painting, Donor can deduct the painting’s full $100,000 FMV. If Donor gives the same painting to, say, a nature conservancy, which will sell the painting and use the proceeds, Donor can deduct only her $20,000 cost.
Note that even if the object is potentially related to the charity’s mission – such as a painting given to an art museum – if the charity’s intention is to sell it upon receipt, then the gift is not for a related use and the donor’s deduction will be limited accordingly.
Note further that art doesn’t necessarily have to be gifted to a museum to be considered for a related use. In Private Letter Ruling 9833011, the IRS ruled that a gift of art to a Jewish community center would be for a related use, as the artwork had both religious and cultural significance. Also, a painting gifted to, say, a hospital may be for a related use, if the hospital will display it in a common area so that it helps foster a healing environment for patients.
The big takeway for nonprofits? Nonprofit boards and staffs should know and understand about “related use,” so they can recognize the issue if it arises.
The big takeway for donors? The donor should obtain, in writing, the charity’s intent to use the property for a purpose related to its mission.