Tax Benefits for Charitable Donations of Horses
Whether motivated primarily by tax-savings reasons or a desire to provide a financial benefit to a not-for-profit program, horse owners frequently inquire about the tax treatment of charitable donations of horse interests. This article describes the applicable rules and points out some available tax-planning strategies for those industry participants who operate their horse activity as a business.
Many donors are familiar with the tax benefits of donating appreciated property—assets having fair market values greater than their tax basis. With a couple of important exceptions, such donors are entitled to charitable contribution deductions measured by the donated property’s fair market value, and, further, they are not taxed on the property’s appreciation—a double tax benefit.
The first important exception to being able to deduct the property’s fair market value is the requirement that the deduction is reduced by the amount of gain that would be ordinary income if the property were sold at fair market value. A horse owned less than two years does not qualify for capital-gain treatment, so a donation of such a horse would be deductible only to the extent of the lesser of (i) the horse’s fair market value or (ii) its cost basis—ordinarily none, if a homebred.
For an appreciated horse held more than two years, the owner must consider depreciation recapture rules. If a horse that would have produced a gain if sold has been depreciated, the recapture rules treat the gain as ordinary to the extent of depreciation taken while held by the owner. For example, if a horse that cost $15,000 and on which $10,000 of depreciation has been taken is worth $25,000 when donated to a veterinary school for use in the school’s program, the contribution deduction would be $15,000 (the $25,000 value less $10,000 of depreciation recapture if the horse had been sold for $25,000).
The second major exception to the rule allowing deductions at fair market value for donated horses limits the deduction to the horse’s tax basis if the donation is made to an organization that would not use the horse to further its charitable purposes. For example, a gift of a horse to the United Way or to a church would not produce a charitable deduction exceeding the horse’s tax basis. Thus, a homebred or fully depreciated horse in such a case would not provide any deduction.
Owners of stallion interests often donate annual breeding rights for charitable purposes. Except when the donor has a tax basis in an annual stallion breeding right—as a result, for example, of purchasing the season—the owner receives no deduction for donating the season.
In almost all cases a sale of a breeding right produces ordinary income. The market value of a donated season must be reduced by this ordinary income element, leaving the donor with no deductible amount. A donor of a breeding right is in much the same position as one who provides valuable uncompensated services or rent-free use of space or equipment to a charity: measurable value has been contributed, but no deduction is allowable.
A donor of property in which he or she has a loss—a tax basis exceeding fair market value—is limited to deducting the lower fair market value. For example, if a horse that cost $15,000 and on which $10,000 of depreciation has been allowable is worth $1,000 when donated to charity, the owner is only allowed a $1,000 deduction.
An owner (who is in a horse business, not a hobby) in such a situation would receive a better tax result by selling the horse for its $1,000 value, realizing a $4,000 deductible loss, then giving the $1,000 to the charity, providing a $1,000 charitable contribution deduction.
Appraisal and Reporting Requirements
For a donation of a horse (and other donations in general) with a value of $250 or more, the donor is required to obtain a written acknowledgment from the charity. This acknowledgment must include a description of the donated property, a statement of whether any goods or services were provided by the donee to the donor in consideration of the donation, and, if any goods or services were so provided, a description of them and a statement or estimate of their value. The donor must obtain this written acknowledgment by the time of filing his or her tax return for the year of the donation.
In the case of noncash gifts totaling more than $500 in a year, the donor must file Form 8283 with his or her federal income tax return. Form 8283 requires a description of how the donor acquired the horse, the date acquired, the donor’s tax basis in the horse, the horse’s estimated fair market value, and the method used to determine value.
If the value of a donated horse exceeds $5,000, the donor must have the horse appraised. The appraisal must be written, signed by the appraiser, made within the time period beginning 60 days before the donation and ending with the due date (including extensions) of the donor’s tax return for the year of the donation, describe the appraiser’s qualifications, include a statement that it was made for income tax purposes, include the appraisal date, describe the appraisal method used, describe the specific basis for the valuation, and, if applicable, describe any agreements relating to the horse’s use or sale. The appraisal must be made by a “qualified appraiser”—one who holds himself or herself out to the public as an appraiser and regularly performs appraisals, is qualified to appraise horses, and is not disqualified. The donor, the donee, the person from whom the donor acquired the horse, or an agent involved in the horse’s transfer are disqualified, as are employees or family members of these persons.
The appraiser also must sign Form 8283. Finally, the appraisal fee must not be contingent on the donated horse’s value.
These extensive documentation and appraisal requirements, where applicable, should not be taken lightly. Failure to comply is likely to result in full disallowance of any deduction for the donated property.
This article was written by members of Dean Dorton’s equine team, a CPA and consulting firm with offices in Lexington, Ky., Louisville, Ky., and Raleigh, NC. Dean Dorton works together with Thoroughbred and sport horse and farm owners around the world on U.S. tax planning, tax compliance, and business operational matters.