To demonstrate an important difference between us and other CPA firms, we have a great example using the Black Friday phenomenon.

On the Friday after Thanksgiving, there are always exceptional deals for early shoppers. The Itemized Deductions Instructions written by the IRS state that a person making noncash charitable contributions may “deduct their fair market value at the time you gave them.” It further notes that the “fair market value is what a willing buyer would pay a willing seller when neither has to buy or sell and both are aware of the conditions of the sale.”

Some of our more crafty tax-planning readers may be thinking of a great scheme.

Example:
What if I bought a TV worth $2,500 for only $500 and then gave it to charity?!

By reading the form instructions, one might believe that a deduction of the fair market value ($2,500) would result in tax savings of $990 (that is, $2,500 times the maximum rate of 39.6%) for a cost of only $500.

Unfortunately, the Itemized Deductions Instructions have limited detail and no information about these specific facts.

The brief advice we would give our example client is that a person can only deduct what they paid for a piece of property.
We prefer to communicate with clients in a way that does not make their eyes glaze over, ensuring that they actually understand the principles being discussed. Other CPAs often cite the Internal Revenue Code in an attempt to impress their clients, but we believe that interactions should be rooted in communication, not showing off. We prefer our clients be impressed with results.

We always aim to provide our clients with simple, effective advice, but in order to do that, we must look at the complex mess of rules that compose our tax code. If we wanted to impress our clients, we would go over the rules relevant to the question:

• § 61 of the internal revenue code states that “income means all income from whatever source derived,” meaning that if a person buys a TV for $500 and disposes it for $2,500 (that would be the price they would be claiming that it is worth when they got rid of it), there is $2,000 of taxable gain.
• § 170(f)(16) covers the contribution of household items, noting that a deduction cannot be taken unless the item “is in good used condition or better.” In our example, the TV would be new, so this requirement would be met.
• § 170(f)(16)(D) notes that household items include electronics.

So how would this work? If someone contributes property like in the example, do they have to write a gain of $2,000 on their tax return and a deduction of $2,500? Thankfully not—the IRS makes this one easy on us!

Regulation § 1.170A-4, which covers contribution of property worth more than its cost, notes that the amount that goes on the tax return should be the fair market value ($2,500) reduced:

“by the amount of gain (hereinafter in this section referred to as ordinary income) which would have been recognized as gain which is not long-term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization.”

(Meaning “by the amount of value over the item’s cost.”) So the $2,500 would be reduced by the gain ($2,000), resulting in a $500 deduction on the tax return.

We did not even discuss the three charitable deduction income limitations, the difference between ordinary and capital property, the difference between personal and business property contributions, the relevant court cases, or any number of other items not included in this “simple” example.

Here we illustrate the level of engagement, depth of analysis, or amount of knowledge one must apply in order to find what should be a simple answer in the Internal Revenue Code.
The Code is wordy, full of technical jargon, and usually overcomplicated, which makes it fairly inaccessible to a mainstream audience. That is why it’s so important to have a knowledgeable and skilled professional at your disposal, someone who can sift through the dense material inherent to Taxation. This is what we do at Sundberg Tax & Consulting. Luckily, we get a laugh out of the sometimes ridiculous language conventions.

Be careful shopping on Friday! While everyone is fighting to be one of the first customers in a store, I am going to be at home enjoying some pumpkin pie, sipping on hot chocolate, and working on taxes.

Happy Thanksgiving, everyone!