Definition
Ordinary income property, for charitable contribution purposes, refers to property whose sale at fair market value on the date of the contribution would have resulted in ordinary income or short-term capital gain. This type of property includes inventory, works of art or manuscripts created by the donor, and capital assets held for one year or less.
Examples
- Inventory: Products held by a business for sale to customers.
- Works of Art or Manuscripts: Created by the donor, such as a painting by an artist.
- Capital Assets Held One Year or Less: A stock purchased and held for less than one year before donating.
Frequently Asked Questions
What is fair market value?
Fair market value is the price that property would sell for on the open market between a willing buyer and willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
How does ordinary income property affect charitable contributions?
When donating ordinary income property, the deduction is generally limited to the lesser of the property’s fair market value or its basis (usually its cost).
Can businesses deduct inventory contributions?
Yes, businesses can deduct contributions of inventory, but they need to follow specific rules and limitations set by the IRS, often receiving a deduction equal to the cost of the inventory.
Are there any special conditions for donating stocks?
Yes, if the stock is held for one year or less, it is considered ordinary income property, and the deduction is typically limited to its cost basis rather than fair market value.
How are short-term capital gains relevant?
Short-term capital gains apply to capital assets held for one year or less. When donated, such contributions are treated similarly to ordinary income property.
Fair Market Value (FMV)
The price that property would sell for on the open market between a willing buyer and willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
Ordinary Income
Income earned through regular business operations, such as wages, rents, and interest.
Short-Term Capital Gain
A gain on assets held for one year or less, which is taxed at higher ordinary income tax rates.
Inventory
Goods and materials that a business holds for the purpose of resale.
Capital Assets
Assets held by an individual or corporation, typically physical property, stocks, or bonds, intended to be held for investment.
Online References
- IRS Publication 526: Charitable Contributions
- Fair Market Value - Investopedia
- Capital Gains and Losses - IRS
Suggested Books for Further Studies
- “Federal Taxation” by William A. Raabe, Gerald E. Whittenburg, Debra L. Sanders
- “Charitable Giving Law Made Easy” by Bruce R. Hopkins
- “J.K. Lasser’s Your Income Tax” by J.K. Lasser Institute
Fundamentals of Ordinary Income Property: Taxation Basics Quiz
### What is the primary characteristic of ordinary income property?
- [x] Property that results in ordinary income or short-term capital gain if sold.
- [ ] Property held for more than one year.
- [ ] Income-producing rental properties.
- [ ] Excess inventory held by a business.
> **Explanation:** Ordinary income property includes property that, if sold, would result in ordinary income or a short-term capital gain, such as inventory or assets held for one year or less.
### Are inventory contributions by businesses deductible?
- [x] Yes, but they follow specific IRS rules and limits.
- [ ] No, inventory contributions cannot be deducted.
- [ ] Only in certain states.
- [ ] Yes, and there are no conditions to this rule.
> **Explanation:** Businesses can deduct inventory contributions, but they must adhere to specific regulations and restrictions set by the IRS. The typical deduction is the cost of the inventory.
### What is fair market value?
- [x] The price at which property would sell between a willing buyer and seller.
- [ ] The historical cost of an asset.
- [ ] The book value of inventory.
- [ ] The insured value of an asset.
> **Explanation:** Fair market value is the price that property would sell for in the open market between a willing buyer and seller, with both having full knowledge of pertinent facts.
### How is a stock held for less than one year categorized?
- [x] As ordinary income property.
- [ ] As long-term capital gain property.
- [ ] As a fixed asset.
- [ ] As equipment.
> **Explanation:** A stock held for less than one year is considered as ordinary income property for tax deduction purposes since its sale would result in short-term capital gain.
### What affects the deduction for donating ordinary income property?
- [x] The lesser of fair market value or basis.
- [ ] The sum of all future income from the property.
- [ ] Only the fair market value.
- [ ] The donor's total income.
> **Explanation:** The deduction for donating ordinary income property is generally limited to the lesser of its fair market value or its cost basis.
### Which property, if donated, limits the deduction to cost basis?
- [ ] Tangible personal property held for 2 years.
- [ ] Fixed business property.
- [x] Inventory held by a business.
- [ ] Long-term securities.
> **Explanation:** Inventory is considered ordinary income property, and the deduction for donating it is typically capped at the cost basis.
### What is considered ordinary income?
- [x] Regular business earnings such as wages and rents.
- [ ] Gains from property selling for a significant profit.
- [ ] Dividends from long-held stock.
- [ ] Long-term capital gains on sold investments.
> **Explanation:** Ordinary income comprises earnings through regular business operations like wages, rents, and interest, which are taxed at standard income tax rates.
### Why is it significant to determine if a property is short-term or long-term for charitable contributions?
- [ ] Only short-term property donations are allowed as deductions.
- [x] It affects the value deductible for charitable contributions.
- [ ] Long-term properties have higher deduction values.
- [ ] Short-term property offers no deduction benefits.
> **Explanation:** The classification affects the deductible value; if a property is short-term, it's often considered ordinary income property, limiting the deduction to cost basis.
### What should be included when calculating fair market value?
- [x] A price between a willing buyer and seller with complete knowledge.
- [ ] The seller's cost.
- [ ] The value per the town appraisal.
- [ ] The lowest price recently quoted.
> **Explanation:** Fair market value involves a mutual agreement on price between a willing buyer and a willing seller, both informed on all significant details.
### What are the tax implications of selling a capital asset held for one year?
- [x] It attracts short-term capital gains tax rates.
- [ ] It qualifies for long-term capital gains tax rates.
- [ ] It is tax-exempt.
- [ ] It falls under depreciation recapture only.
> **Explanation:** Selling a capital asset held for one year treats it as generating short-term capital gain, thus taxed at ordinary income tax rates.
Thank you for exploring the intricate details of ordinary income property and tackling challenging quiz questions. Keep expanding your knowledge in taxation!
