A significant achievement of certified public accountant training is dispensing uniform standards for CPAs to apply in accounting work. This is particularly critical for learning about tax return preparation. The IRS imposes a large number of standardized forms and mandatory reporting measures.
Over the years, the IRS has refined the forms and record keeping requirements designed to restrict fraudulent tax filing. A commonly abused area of the past was claims for tax deduction of non-cash charitable donations. Accountants are first exposed to the IRS rules about this subject in CPA exam courses.
The IRS has distinctive requirements that depend upon the value of donated property. Form 8283 is completed when any property donation exceeds $500. This form is submitted in the tax year that property is contributed and the deduction is first taken for that contribution. A potential stumbling block arises when those are two different years.
For example, one of the items covered during CPA exam preparation is that the tax deduction for charitable contributions is limited. Only taxpayers who itemize deductions are eligible to claim donations to charity. In addition, charitable contributions cannot exceed a specified percentage of income – usually 50 percent. The amount exceeding this income restriction is carried over for deducting in future tax years.
If an individual uses the standard deduction, charitable contributions are generally ignored. However, a vital exception exists. The amount of charitable giving that is not deductible even if the taxpayer itemized comprises a carryover. The standardized rule from a CPA exam study guide therefore conveys that some taxpayers taking the standard deduction will have charitable contribution carryovers.
These situations usually arise for taxpayers who do not itemize deductions but make single charitable donations of property with substantial values. This triggers consideration of another limitation. That is, tax deduction for donation of capital gain property is capped at 30 percent of adjusted gross income. Hence, CPA exam study material shows that this ceiling applies when it is less than the amount under the 50 percent limitation for cash contributions.
Tax accountants can find themselves calculating a charitable donation carryover for taxpayers who use the standard deduction. These situations are tackled by determining the limited charitable deduction that would occur when itemizing. That figure is subtracted from the value of all donations.
Of course, a donation of non-cash property would have necessitated filing Form 8823. That isn’t required when the standard deduction is used. However, tax preparers may want to create one anyway. It shows the donation details in the contribution year even though the deduction is carried over. Submitting a copy of this form and an explanation of the carryover seems suitable for the future year that the taxpayer itemizes and uses the carried forward charitable deduction. This way, the IRS obtains a Form 8823 as required for the contribution year – despite the deduction reported in a different year.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.