Ordinary Income Property

Ordinary income property refers to property whose sale at fair market value on the date of the contribution would have resulted in ordinary income or in short-term capital gain. It includes inventory, works of art or manuscripts created by the donor, and capital assets held one year or less.
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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

  1. Inventory: Products held by a business for sale to customers.
  2. Works of Art or Manuscripts: Created by the donor, such as a painting by an artist.
  3. 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

  1. IRS Publication 526: Charitable Contributions
  2. Fair Market Value - Investopedia
  3. Capital Gains and Losses - IRS

Suggested Books for Further Studies

  1. “Federal Taxation” by William A. Raabe, Gerald E. Whittenburg, Debra L. Sanders
  2. “Charitable Giving Law Made Easy” by Bruce R. Hopkins
  3. “J.K. Lasser’s Your Income Tax” by J.K. Lasser Institute

Fundamentals of Ordinary Income Property: Taxation Basics Quiz

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