To Charity Isn’t an Instant Tax Break — Donating Domains
Want to donate a domain name to charity to take a deduction on your tax return? Not so fast…
As the end of the year approaches many United States residents are receiving solicitations for donations ahead of the end-of-year cut off for tax deductions. Some people think donating domain names is a nifty way to get a tax break. But it isn’t.
In March of this year the domain name Farm.com was donated to Boston Foundation, a non-profit which later sold the domain name to Pets United LLC for $200,000. The Boston Globe wrote regarding the donation and mentioned a domainer name Rob Grant who donated 107 domain names to a university. Apparently Grant thought he could take a $99,040 deduction on his tax return since that’s how much the 107 domains were appraised for. As I wrote in March, it doesn’t work that way.
A couple years ago Congress started looking at one of the biggest taxpayer tricks: donating items to charity at inflated prices. Under the U.S. tax code, if you make a donation of $100 to a non-profit organization you can deduct that amount from your noted earnings for tax purposes. If you’re in the 33% tax bracket you would then “save” $33 on your taxes. Congress specifically wanted to stop the practice of people donating cars and deducting an inflated value when the charities were selling these cars at auctions for much less. Taxpayers were deducting $10,000 on their tax returns when the charity was only realizing $5,000.
The intellectual property world looked at this fresh rule and decided that donating patents to non-profits was no longer a gravy train. Firms were donating patents to Universities and deducting the amount they were appraised for; Universities were realizing little if any value from the patents.
Fast-forward to 2006. This Summer Congress passed major revisions to charitable tax laws. Consider household goods, such as used clothes and appliances. As of August 17, 2006 donations of these items are only deductible if they are in good or fresh condition. You can take a deduction for items over $500 that aren’t in good condition if you get an appraisal. Bottom line: no more dumping off old jeans at Goodwill and taking a deduction.
Congress even changed the rules for donations of appreciated property, which might include domain names. The fresh rule states that if you donate an item to charity you can only deduct the lesser of what you paid for it or what it’s right now worth unless the charity keeps it for its own use for an extended period of time. I’m not a CPA, but this might even preclude former donations like Farm.com from being deductible for more than what the donater originally paid for the domain. In order to take the deduction the domain owner would have to sell the domain and then donate the proceeds. To make matters more complicated, the seller of the domain would have to pay taxes on his gain ahead of making the donation.
But what if you donate a domain name to a charity that plans to use it?
I received a phone call this year from a non-profit that was interested in acquiring and using a domain name I owned. The charity asked if I’d donate the domain to them and told me I could take a tax deduction. (I didn’t do it for a couple reasons, one of which was the non-profit wasn’t a group I had any reason to support.) Looking strictly at the financial side, I figured any appraisal for the domain wouldn’t hold up with the IRS. Yes, the non-profit planned to use the domain. But let’s say I paid $100 for the domain and had it appraised for $10,000. (Nevermind the fact that that appraisal would be bogus.) Assuming the charity planned to use the domain name, I might take a $10,000 deduction on my taxes. But then if the charity decided not to use it and sold the domain within the next three years I might have to reduce that deduction.
Gray area? Perhaps. But ahead of you take that deduction, consider the penalties if the IRS decides you’ve inflated the value of your donation. If you claim a value that’s 50% higher than what the IRS decides the value actually is, you have to pay the difference plus a 20% penatly. If you claim a value that’s more than twice what the IRS decides the value actually is, you pay the difference plus a 40% penalty.
