Substantiating Non-Cash Charitable Contribution Deductions – All Appraisals Are Not Created Equal

September 2018 | Posted in Forensic Litigation & Valuation
Forensic Litigation & Valuation

New Rules

On July 30, 2018, the Internal Revenue Services (IRS) issued final regulations pertaining to the substantiation and reporting for cash and non-cash charitable contribution deductions. The regulations are intended to allow the IRS to determine if a taxpayer is entitled to a claimed deduction for a charitable contribution.  The regulations also set forth new definitions of “qualified appraisal” and “qualified appraiser”.

The requirements differ when one of three value thresholds is exceeded: $500, $5,000 and $500,000. In general, a qualified appraisal must be obtained for claimed non-cash contributions of more than $5,000.  If the contribution value exceeds $500,000, the appraisal must be attached to the contribution year’s tax return.

A “qualified appraisal” has the following two characteristics:

  • It is conducted by a “qualified appraiser”; and
  • It is conducted in accordance with “generally accepted appraisal standards.”

A “qualified appraiser” means:

“An individual with verifiable education and experience in valuing the type of property for which the appraisal is performed.” 

Who Qualifies?

The requirements to substantiate the value of a non-cash contribution deduction are getting more stringent. Not only are the documentation requirements more detailed (the regulations specify required content for qualified appraisals), but those whom the Service considers to be qualified to do an appraisal are going to be limited (the rules for qualified appraisers apply to contributions made on or after January 1, 2019.)  Only those with verifiable education and experience are considered “qualified” in the eyes of the IRS.  Notice the word and in the previous sentence.  This is not an “either/or” situation – appraisers must demonstrate both education and experience.  This can be accomplished one of two ways: 1) a combination of successful coursework and two years of directly relevant experience, or 2) having earned a professional appraisal designation for the type of property in question.

The rules provide some helpful guidance on those who will NOT be considered a qualified appraiser.  Those individuals include:

  • The donor of the property
  • The donee of the property
  • A related individual (employees, spouses, etc.)
  • An “in-house” appraiser.

The exclusion of donors and donees is particularly interesting. It is not uncommon for the donor and/or donee to be in a knowledgeable position about the contributed property and, therefore, reasonably able to assess its value.  We have assisted many closely-held business owners who have contributed ownership interests in their businesses to a charitable entity of some type.  In some (but not all) cases, the owner has a good feel for the value of the business, and the proportional value of the contributed shares.  However, the IRS will no longer take their word for it.  The implication is that an independent, third-party appraiser needs to put forth the value claimed as a deduction.

Another interesting comment in the preamble of the regulations has to do with what does or does not count as “successful completion of professional or college-level coursework in valuing the type of property”. The following is stated:

“However, mere attendance at a training event is not sufficient, and evidence of successful completion of coursework is necessary under the final regulations.”

The Takeaway

All appraisals (and appraisers) are not created equal in the eyes of the IRS. Be careful to select those appraisers who are qualified to provide what will now be required under these new regulations.

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