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I got a frantic phone call from my friend April last week.  Her animal welfare organization had been lucky enough to get office space donated.  She followed all the best practices, including sending him a thank you letter confirming his donation.  The donor called to tell her the in-kind donation he claimed on his tax return had been rejected by the IRS.  She was beside herself, not knowing what to tell him and scared that the donor would remove his support since he couldn’t claim a deduction for his donation.



After I got her to take a breath, I had to tell her that the IRS was correct in rejecting the claim for a tax-deductible contribution.  The tax code states that if the donor retains ownership of the property and simply donates the use of space, the donor cannot claim that in-kind contribution as a charitable deduction on their tax return.



It was easy to understand her distress and confusion.  After all, if he had donated money to her nonprofit to pay rent, then he could claim that as a deduction.  “Hey, that’s not fair!” you might think – or yell it out loud like April did.  What’s the difference?



Well, actually when you work through the logic, it does make sense.  The donor didn’t report any income for that rental space because he hadn’t received any.  By also claiming a charitable donation, that was “double-dipping” against his taxable income – once for the zero reported income and again for the charitable donation.  What the donor CAN do is claim any expenses that he has incurred for that property: utility bills, repairs, and so forth.




So what happened to April?  After we clarified the IRS position to the donor, he understood and chose to continue supporting her work with the office space donation.  Everyone understood the rules and it was a happy ending!





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Comments

#
Wednesday, September 30, 2020 3:32 PM
So an organization can donate the money for you to pay them rent, but not the actual space itself?
ggopher
# ggopher
Thursday, October 1, 2020 10:08 AM
The donor CAN donate the space itself but the value of that rent is not a deductible contribution. Think of it this way: if the donor gives money which the organization uses to pay the rent, the donor claims the rent as income and the monetary donation as a deduction so the net effect is zero. It's the same bottom line as simply donating the space. That is how the IRS agent explained it.

Interestingly, the value of the rent can be shown on the nonprofit organization's books is an "in-kind" contribution which can be used to show support for its programs. In some cases it is allowable as an in-kind match for grants (depends on the grant maker's guidelines).

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