Jason LeRoy of Doeren Mayhew
By Jason LeRoy, ASA, CVA, CFE – Shareholder, Valuation and Litigation Support Group

Business owners may desire to donate a portion of their privately held business to charity. As such, a tax deduction in the amount of the contribution can be taken in the year the donation is made. Per Internal Revenue Service (IRS) requirements, substantiation of the amount of charitable contribution must be made through an appraisal prepared by a qualified appraiser. Since these tax deductions are carefully monitored by the IRS, you need to rely on a qualified appraiser, like those at Doeren Mayhew, to assist you in providing an accurate and thorough qualified appraisal.

When is a Qualified Appraisal Required?

If an individual is claiming a deduction for a charitable contribution of a privately held business of $10,000 or greater, an appraisal by a qualified appraiser is required and Form 8283 should be included with the individual tax return. For any charitable contributions of a privately held business of $500,000 or greater, a copy of the qualified appraisal needs to be attached to the income tax return.

What Defines Who is a Qualified Appraiser?

In order to become a qualified appraiser as defined by the IRS, the appraiser must meet the following:

  1. The appraiser either has earned an appraisal designation from a recognized professional appraiser organization or has met certain minimum education and experience requirements.
  2. The appraiser regularly prepares appraisals for which he or she is paid.
  3. The appraiser demonstrates verifiable education and experience in valuing the type of property being appraised. To do this, the appraiser can make a declaration in the appraisal that, because of his or her background, experience, education and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued.
  4. The appraiser has not been prohibited from practicing before the IRS at any time during the three-year period ending on the date of the appraisal.
  5. The appraiser is not an excluded individual.

Potential Penalties

Having a qualified appraiser determine the fair market value of the charitable contribution is essential to diminish the risk of incurring a penalty. The penalties imposed by the IRS to the individual taxpayer for misstating the value of a charitable contribution of an interest in a privately held business are as follows:

20 Percent

The penalty is 20 percent of the underpayment of tax related to the overstatement if:

  • The value or adjusted basis claimed on the return is 200 percent (150 percent for returns filed after Aug. 17, 2006) or more of the correct amount, and
  • You underpaid your tax by more than $5,000 because of the overstatement.
40 Percent

The penalty is 40 percent, rather than 20 percent, if:

  • The value or adjusted basis claimed on the return is 400 percent (200 percent for returns filed after Aug. 17, 2006) or more of the correct amount, and
  • You underpaid your tax by more than $5,000 because of the overstatement.

Date of Appraisal

The question often arises if a prior appraisal of a privately held business can be used as a qualified appraisal for a charitable contribution. The IRS has a 60-day rule which requires a qualified appraisal to have a valuation date of not more than 60 days before the date of contribution of the appraised property.

Appraisal Reporting Requirements

The IRS provides a detailed list of information required to be included within a qualified appraisal report for charitable contributions, such as:

  • A description of the property in sufficient detail for a person who is not generally familiar with the type of property to determine the property appraised is the property that was contributed
  • The physical condition of any tangible property
  • The date of contribution
  • The terms of any agreement or understanding entered into by or on behalf of the donor that relates to the use, sale or other disposition of the donated property
  • The name, address and taxpayer identification number of the qualified appraiser and, if the appraiser is a partner, an employee or an independent contractor engaged by a person other than the donor, the name, address, and taxpayer identification number of the partnership or the person who employs or engages the appraiser
  • The qualifications of the qualified appraiser who signs the appraisal, including the appraiser’s background, experience, education and any membership in professional appraisal associations
  • A statement the appraisal was prepared for income tax purposes
  • The date on which the property was valued
  • The appraised fair market value on the date of contribution
  • The method of valuation used to determined fair market value, such as the income approach, the comparable sales or market data approach or the replacement cost less depreciation approach
  • The specific basis for the valuation, such as any specific comparable sales transaction

Qualifying Your Contributions

Doeren Mayhew’s team of qualified appraiser can help prepare a qualified appraisal report to reduce the risk of incurring a penalty due to misstating the value of the charitable contribution. Our reports will deliver the accuracy you need and meet all the IRS requirements to get the tax deductions you deserve for your generous charitable contributions. Contact our valuation specialists to get your contributions qualified today!