If a corporation with $1M of taxable income donates a piece of land that has been...

If a corporation with $1M of taxable income donates a piece of land that has been held for several years and has a fair market value of $15,000 and an adjusted basis of $4,000 how much can it deduct?

(My personal questions)

1. what do you do with the FMV and adjusted basis... what are they for?

2. what is the answer?

Expert Solution

1.Fair market value is the value the property fetches when offerred on sale, at an arm's length transaction, the buyer being fully aware of the status of the property, ie.,without using any sort of coercion or influence or under any qualifying conditions.

Since the land in this case, had been held by the corporation,for a long time, its value would have appreciated & hence the value for transer to the charity will be the FMV .Here, the corporation's acquisition & improvement costs cannot be used, as a matter of financial good sense.

Basis means cost basis,ie. An asset's basis starts with or originates from, its purchase price or acquisition cost & gets added as any additions or improvements are made .As & when any major improvement cost is incurred, the basis of the asset is adjusted. Since this is land, there is no depreciation.

For other assets , depreciation will be deducted.That is how, we get the carrying value of the asset (gross value-Accumulated deprecistion)--when calcualting the gain or loss on asset sold/exchanged.

So,that is the adjusted basis---cost of the asset getting-on adjusted, till the time it is sold/exchanged/retired.

This basis is required for calculating the gain or loss on sale/tranfer --for taxation purposes.

2. As per IRS Publication 526 --deductions for Charitable contributions,

The deductible amount for corporations making Non-cash charitable contributions, to qualifying 501 C(3) organisations, is the FAIR MARKET VALUE--- appraised & declared , on their own behalf---BUT--limited to (ie. subject to a maximum of) 10% of its taxable income--which is $ 1000000*10%=$ 100000

So, the LESSER of $ 15000 OR $ 100000

is $ 15000

So the deductible amount is $ 15000

ekkarill92 answered 2 years ago

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