Doing so helps out families in need and the donor gets a charitable tax deduction if they itemize using the Schedule A tax form. The charitable deduction is based on the value of the items at the time of the donation.
But when family child care providers make donations of used items to charities the tax consequences are much more complicated.
You cannot claim a charitable contribution for an item that you have already fully deducted as a business expense. Doing so would be getting a double tax benefit for the original purchase price.
Let’s look at an example: Someone who is not a child care provider buys a toy for $50 for her own children. Several years later she donates the toy to Goodwill. At that time she estimates that the toy is worth $10 and she claims a $10 charitable deduction.
A family child care provider buys a toy for $50 and uses it exclusively in her business. She deducts $50 on her tax return as a business expense. Several years later she donates the toy to Goodwill. She can’t claim the $10 charitable contribution because she has already deducted the full cost.
Larger Charitable Donation
What if the provider bought a sofa for $800, depreciated it as a business expense and then donated it to Goodwill? Can she claim a charitable contribution? Maybe.
The provider must estimate the value of the used sofa at the time of the donation and compare this number with the adjusted basis of the sofa. She can then claim as a charitable conrtibution the lower of these two numbers.
What does “adjusted basis” mean? Glad you asked! The adjusted basis of an item is the purchase price minus the amount of depreciation that has been claim on the item.
Furniture and appliances are normally depreciated over 7 years. If this provider had the sofa for five years, and her time-space percentage was 40%, here is what she would have claimed in depreciation:
Year 1: $800 x 40% = $320 x 14.29% = $45.73
Year 2: $800 x 40% = $320 x 24.49% = $78.37
Year 3: $800 x 40% = $320 x 17.49% = $55.97
Year 4: $800 x 40% = $320 x 12.49% = $39.97
Year 5: $800 x 40% = $320 x 8.93% = $28.58
Total depreciation claimed: $248.62
Her adjusted basis is the purchase price ($800) minus the depreciation claimed ($248) or $552. If she estimates that the value of the sofa at the time of the donation was $300, she can claim a $300 charitable contribution because it’s less than $552. If she estimates that the value of the sofa was $600, she could only claim a $552 charitable contribution.
Wow, this is complicated! For more information on how to depreciate items, see the annual edition of my Family Child Care Tax Workbook and Organizer.
One More Example
A provider buys a toy for $50 toy and uses it for both
business and personal purposes. Her time-space percentage was 40% and
she deducted $20 as a business expense in the year she bought it ($50 x
40% = $20). At the time she donates it to charity she estimates the toy is worth $10. To see if she can claim a charitable contribution she compares $10 with the adjusted basis of the toy.
The adjusted basis is the purchase price ($50) minus the amount she has already deducted ($20) or $30. Since $10 is lower than $30 she can claim a $10 charitable contribution. She can’t claim a contribution higher than $30.
Tom Copeland – www.tomcopelandblog.com
Image credit: www.goodwillnm.org
For a detailed explanation about charitable contributions and what to do when you sell an item used in your business, see the annual edition of my Family Child Care Tax Workbook and Organizer.