Before You File-What to do with those charitable contributions

#Money Monday

 While I hate to be the bearer of bad news, you must know that another tax filing season is upon us. Since I know most of you are not enthusiastic about taxes or even filing, perhaps I should commence with the good news.

This year, the deadline for filing your 2022 individual federal income tax return, is April 18, 2023, and not April 15, 2023. With three additional days to file, something tells me that annual procrastinators will still file late. Just remember that the penalty for filing late if you owe is 5% of the tax liability, compounded daily up to 25% plus interest. At a minimum, you should file an extension.

We all should breathe a sigh of relief, knowing that the Internal Revenue Service (IRS) suspended the implementation of having third-party companies and platforms report all of our Cash App, Zelle, Paypal, Venmo and other digital transactions. However, be advised that you may receive IRS Form 1099 next year for your Cash App and other transactions executed in 2023.

How it Works

 The IRS audits a small percentage of tax returns each year. What sets you up for an audit is what the IRS describes as your Discrimination Information Function (DIF) score. Are you still with me, or have I lost you already? Let me translate into English. The DIF score is how the IRS flags tax returns where filers are over-reporting deductions or under-reporting income. Based on your DIF score, you will be audited.

What are some of the most audited areas? Some of these areas are home office deductions, Schedule C filer expenses, job expenses, rental losses, charitable contributions, earned income tax credit, capital gain losses, to name a few.

Tax Rules

This year I decided to share information on tax rules and not specific deductions or credits. Why? Because you might be eligible and should qualify for a deduction or credit. However, because you didn’t follow the rules, you just excluded yourself from taking advantage of an expense, deduction, or credit. An example of this would be charitable contributions.

Charitable Contributions:

Most of you know, or should know, that you are allowed a charitable contribution deduction each year. That’s not the tricky part. The tricky part occurs when taxpayers charitable contributions are reduced, disallowed or denied because of failure to comply with the tax rules or laws.

Here is an example.  If you donate property such as clothing, the receiving organization may not provide you with a value amount to deduct. Therefore, what happens is that most taxpayers assign a number to their contributions, without knowing the applicable rules. The first thing you need to know is that clothing deductions are subject to special contribution rules under Section 170 of the Internal Revenue Code. Sure taxpayers can deduct clothing but only if they are in “good used condition or better”.

Does anybody really know what that means? No! Tax court cases have revealed that you are not allowed to deduct the cost price paid for the article of clothing despite the fact that it was never used or worn, even if the tag is still on the item when donated. A reasonable question to ask yourself is what would that item sell for in the used thrift store? If the fair market value (FMV) amount of clothing exceeds $500 and is not in “good used condition or better” you will need to support your donation, with a qualified appraisal.

Donating a vehicle is another area where special contribution rules apply. If the fair market value (FMV) of the vehicle donated exceeds $500, your charitable contribution deduction may depend on additional factors. The first is, if the donated vehicle is sold without the donee charitable organization providing a significant intervening use of the vehicle or did not make any material improvements to the vehicle; then your deduction is limited to the gross amount from the sale of the vehicle. While I could see a taxpayer saying, I just changed the oil, bought a new battery or changed the tires on the vehicle all of which should increase the value of the donated vehicle’s deduction; in the end, the sale price may control your deductible amount. If the value of the donated vehicle increased since it was purchased, then you will also have to calculate the basis or cost of the vehicle and any related depreciation, in order to figure out the amount of your charitable contribution.

Final point on charitable contributions for now is that you need to ensure that the receipts you received from the donee organization are contemporaneous. This term means you should have the receipts or records prior to filing or at the time you filed your tax return.

One short story. One client of mine had claimed a charitable deduction based upon their church receipts. They were audited and because they could not produce all the receipts at the time, the IRS denied their deduction. During the audit I discovered that some of the receipts were missing and requested them from the church treasurer. The IRS pushed back saying because the missing receipts were not contemporaneous, the deduction was going to be denied. What!

Needless to say, while that was technically true, it was ridiculous! My client had canceled checks, bank statements and other supporting documentation; but because some of the receipts were missing at the time of the initial audit and when the returns were filed, their contributions were being denied. At the end of the day we won and my client avoided paying any taxes.

Schedule C

 While you are running your side hustle, you may be filing IRS Form Schedule C on which you are claiming expenses. The first thing I would say is that you do not need to produce or have every receipt related to your expenses in order to justify the expenses. Why? This is because of what we call the Cohan Rule. This rule says that if a taxpayer can reasonably estimate his or her expenses, using other methods of support without the actual receipt, the deduction should be allowed.

You see, Mr. Cohan ran a business and was audited by the IRS. On his return he listed expenses but could not produce any receipts and therefore the IRS denied all his expenses and taxed him heavily. The tax court ruled against the IRS and required them to allow some expenses based upon estimates and other factors.

Today, the IRS has punched back since Cohan and has created new rules, while allowing Cohan to remain in place. The IRS narrowed the list of expenses for which no documentation is required. For example, the rules in effect today require you to produce telephone receipts if you want to claim that as a deduction on your taxes. Failure to produce telephone receipts will result in denial of those expenses. Telephone receipts are mandatory.

In the end, taxes and tax matters are not one of our favorite or most enjoyable duties as citizens. Each year there are rule changes, higher rates and what seems to be lower refund amounts. But as the saying goes, the only certain things in life are death and taxes!

WHAT’S UP!

Today’s what’s up is about tax deadlines. If you have a S-Corporation or a Partnership or LLC taxed as a partnership, your filing deadline is March 15, 2023. You can file for a six month extension if you cannot meet this deadline. If you have a business corporation, the filing deadline is April 18, 2023. Individual taxpayer filing deadlines is April 18, 2023. If you file an extension, your deadline is October 16, 2023. And that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC . Give2Get Rich, LLC 2023. All Rights

 

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