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REG CPA Practice Questions: Deducting Charitable Contributions
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on deducting charitable contributions as itemized deductions. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-how-to-deduct-charitable-contributions/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:47 Question 1: Cash Contribution Limit 03:19 Question 2: Personal Property Contribution Limit 05:05 Question 3: Ordinary Income Property Contribution Limit 07:18 Question 4: Applying the Different Limitations in the Correct Order 11:25 Question 5: Charitable Events and Providing Service to a Charity 14:02 Pillar Topics
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0:00
Welcome to another Reg Walkthrough video
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I'm Logan, and in today's video, we're going to be going over charitable contributions
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as itemized deductions, and we're going to be learning it the Superfast CPA way, which
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is diving straight into questions. If this is the first thing you're seeing from us and you want to learn more about our strategies
0:16
make sure you go to superfastcpa.com and watch our free one-hour webinar training where we
0:22
teach the six key ingredients to passing the CPA exam. Again, it's only one hour long, it's free, and it will save you so much struggling with
0:29
the CPA exams, I promise. The link will be in the description and it looks like this
0:33
And also, make sure you check out our Superfast CPA app, where we have five-question mini-quizzes
0:39
audio notes, and review notes that you can constantly access on your phone throughout
0:43
the day to be continually studying. With all that said, let's dive straight into the questions
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Okay, here's question one. Mark, a married taxpayer filing jointly, has an adjusted gross income of $50,000 for the year
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He has already made a single cash donation of $40,000 to a qualified non-profit charity
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that works to provide education to underprivileged children. Assuming all contributions are substantiated, what is the maximum amount Mark can claim
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as a charitable contribution deduction for this year, considering the AGI limitations
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for cash donations to public charities? Unlike in other videos, most of these questions we're going to be going straight to the answer
1:20
because each question is going to be teaching a different part of charitable contributions
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So let's go straight into the answer so we can start learning how cash contributions
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work as itemized deductions. Okay, here's the answer. $30,000. Taxpayers can deduct cash contributions up to a limit of 60% of their AGI to qualified
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charitable organizations. This can include cash or check, of course, and also credit card charges, as long as the
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charge is in the correct year. The charge does not have to be paid off in the same year to qualify for a contribution deduction
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So you could pay money to a charity with a credit card and you don't even have to pay
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off the credit card in the given year. Therefore, Mark can claim a deduction of $30,000, which is 60% of his $50,000 AGI for his cash
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donation, and he may carry over the excess amount of $10,000 for the subsequent five
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years subject to the IRS's carryover rules and limitations. And basically, contribution carryovers are used on a first in, first out basis each year
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Qualifying organizations typically include 501c3 nonprofit organizations and religious organizations. Those are the most common that you're going to see
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Gifts given to people or contributions to political campaigns do not fall in these categories
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and are not deductible. So you can't just give $10,000 to a friend and count it as a charitable contribution
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There are rules for gifts, but again, most of that is in TCP now, so we're not going
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to deal with that in reg. As a general rule, all charitable contributions must have documentation of the contribution
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and amounts. And that's kind of what this substantiation was talking about there
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There has to be some evidence that you paid for something like a receipt or things like that
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If the contribution was not in the current year or there is not documentation, then no
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deduction may be taken. So you can't just randomly say, I gave $1,000 to this charity, but if you don't have the
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documentation, then you can't take the deduction. All right. So we learned a lot
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Specifically, cash donations have a 60% AGI limitation. Let's go to the next question
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Okay, here's question two. Samantha, a single taxpayer has an adjusted gross income of $80,000 for the tax year
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She donated a piece of antique furniture to a qualified local museum
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The furniture, which she originally purchased for $5,000 five years ago, has a current fair
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market value of $20,000. The museum has provided Samantha with proper documentation, acknowledging the donation
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and stating that the furniture will be used as part of their permanent collection, which
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is open to the public. What is the maximum amount Samantha can claim as a charitable contribution deduction for
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this tax year? So we haven't learned anything about property contributions. We've only learned about cash contributions so far
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So let's go ahead and go straight into the answer to see how these work. Okay, here's the answer
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$20,000, which that looks like that's the fair market value. When donating personal property other than cash for a qualified organization, the deduction
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is generally equal to the property's fair market value at the time of the donation
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provided it has been held for more than one year, thus qualifying as a long-term capital gain property
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And we'll see why that matters in the next question. Since the antique furniture is worth $20,000 and assuming Samantha has not exceeded the
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$30,000 AGI limitation for donations of appreciated assets to public charities, she can claim
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the full fair market value as a deduction. If she had other contributions that approached or exceeded the 30% AGI limit, then she would
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need to adjust the deduction accordingly and might have to carry over the excess to future years
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So in this case, she's under the 30% limit of AGI for property donated, so she can take
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the full $20,000 deduction. And again, specifically for personal property donated that falls under this 30% AGI limitation
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rule, you use the fair market value. All right, let's go to the next question to learn a little bit more
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Okay, here's question three. Laura, a single taxpayer, operates a small craft business and has an adjusted gross income
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of $40,000 for the year. She donated handmade crafts from her inventory to a qualified nonprofit organization that
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sells the items to raise funds for its activities. The crafts had cost Laura $2,000 to make and had a fair market value of $5,000 at the time
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of donation. What is the maximum amount Laura can claim as a charitable contribution deduction for
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these items? Okay, so these are items from her business, and we're going to learn if this is different
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than the above situation where it was personal property, like the furniture that was donated
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So let's go ahead and go into the answer to see if there's anything different. Okay, here's the answer
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So $2,000, which is the cost, not the fair market value, so this is a different situation
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When donating property that would result in a short-term gain or ordinary income if sold
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such as short-term assets, inventory, or property held mainly for sale to customers, so in this
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case Laura's crafts, the deduction is generally limited to the lesser of the taxpayer's cost
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basis in the property or the fair market value. So in this case, because this is property that was either short-term or was mainly from
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a business, like inventory or stuff that you sell, this is treated a little bit differently
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In these situations, additionally, there is a 50% AGI limitation that applies for ordinary
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income property. In this scenario, her deduction does not exceed these thresholds since her cost basis
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is well below the 50% of AGI. If Laura had other contributions that approached or exceeded the 50% AGI limit, then she would
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need to adjust the deduction accordingly. So far, there's three different percentage limitations when it comes to charitable contributions
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There's the 60% cash contribution, again, 60% of AGI. There's now this, the 50% AGI limitation for ordinary income property, which is stuff that's
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more like short-term gains or inventory or things like that from a personal business
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And then there's finally the 30% AGI limitation for personal property or long-term property
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So again, there's three different percentages and we've learned the three so far
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Let's go ahead and see how these interact together in the next question
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Okay, here's question four. Patricia, a single taxpayer has an adjusted gross income of $50,000 for the tax year
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During the year, she made the following charitable contributions, a cash donation of $20,000
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to a qualified local food bank, office supplies valued at $8,000 with a cost basis of $5,000
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to a qualified public school. These supplies were held as inventory for her business and shares of stock valued at
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$25,000 to a qualified environmental organization, which she purchased for $10,000 two years ago
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So assuming all of these contributions are substantiated, again, they have proper documentation
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and everything. And given the IRS rules and AGI limitations for charitable contributions, what is the
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maximum deduction Patricia can claim on her itemized deductions for this year
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Okay, we've learned about all three of these, the cash donation, the ordinary income donation
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ordinary income property donation, excuse me, and the long-term personal property limitation
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So we've learned all three of these different things. Take a second, pause the video, see if you can figure out how this would work
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So with that said, it is an interesting calculation that you probably wouldn't think of
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So if you want, go ahead and pause the video to see if you could figure it out, but we're
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going to go straight into the answer because it's fairly involved. Okay, $25,000
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So let's go into this complicated calculation. When a taxpayer has multiple different types of donations, you apply the limitations in
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this order. First cash donation of 60%, then ordinary income property with a 50% limit, and finally
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long-term capital gain property with the 30% limit. So you apply it in that order
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So let's go through it. The cash donation is subject to the 60% AGI limit
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Her AGI is 50,000. So 60% of that is 30,000. Her cash donation of 20,000 does not exceed this limit
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So the full amount is deductible. So we start with that $20,000
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The office supplies are ordinary income property. First you calculate the 50% AGI limit, which in this case would be $25,000
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Then you subtract the cash donation already allowed, which is the $20,000
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So that leaves a $5,000 limit. So they interact in an interesting way
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The 50% AGI limit is affected by the 60% AGI limit if there are cash contributions
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So the 50% AGI limit is now lowered to $5,000. Now since the cost basis of the office supplies is lower than the fair market value, then
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she uses $5,000 as the amount that she would have deducted. And since that's the same as this limit, she can deduct the full $5,000 for the office supplies
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Now this is where it gets even more tricky. The long-term capital gain property, which was the shares of stock, is subject to a 30
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AGI limitation, which would be $15,000 for Patricia. However, once you reach long-term capital gain property, after doing the other two steps
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the AGI limitation used is the lesser of the 30% AGI limit, which in this case is $15,000
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or the 50% AGI limit remaining after subtracting the allowed cash contribution and the allowed
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ordinary income property contribution. So remember the 50% limit was originally $25,000
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We subtracted the $20,000 cash contribution from the 60% limit and we subtracted the $5,000
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of ordinary income contribution. So actually the 50% AGI limit is now zero once we get to the long-term capital gain property
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Since there is no remaining AGI limitation space for this contribution, because the cash
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and the ordinary income property contributions have already used up the 50% AGI limit, there
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is no deduction available for the long-term capital gain property this year, and it may
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be carried over to subsequent years. So in total, she can take the $25,000 charitable contribution deduction for the cash and then
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the ordinary income property. So again, this is a complicated calculation. It's not something that you are likely to see often
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So hopefully you won't have to deal with this, but it is important to know that there is
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that order and the limitations affect each other. So let's go to the last question just to finish up. Okay
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Here's question five. Alexander, a single taxpayer with an adjusted gross income of $60,000 engages in the following
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charitable activities during the year. He donates a used personal computer to a religious organization he regularly attends
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The computer was originally purchased for $1,500 two years ago and has a current fair
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market value of $700. Alexander purchases movie tickets for all his family and friends for $500 to attend
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a charity movie night organized by a qualified nonprofit organization. The fair market value of the entertainment provided at the movie night was $200
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He spends 10 hours per month volunteering at a local food bank. His professional services as a consultant are valued at $100 per hour
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Which of the following correctly reflects Alexander's total potential charitable contribution deductions for the year? Okay
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A few more things thrown in here. So just to finish out, let's go ahead and look at the answer to see what else we need
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to learn. Okay. The answer is $1,000. The donation of personal property like a computer to a religious organization is generally deductible
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at the item's fair market value at the time of the donation, provided the taxpayer itemizes
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deductions and the organization is qualified. Since the computer's fair market value is $700, this is the amount Alexander can deduct
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not the adjusted basis or the original purchase price. So again, as a general rule for personal property that you've had for a while, that's not ordinary
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income property, it's the fair market value that's used. When purchasing tickets to a charity event, the deductible portion is the amount exceeding
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the fair market value of the benefits received. Therefore, Alexander can deduct $300, $500 ticket price less the $200 fair market value
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of the entertainment. The IRS does not allow deductions for the value of time or services provided to a charity
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Therefore, even though Alexander's professional rate is $100 per hour, the 10 hours per month
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he volunteers at the food bank does not count towards his charitable contribution deductions
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If Alexander had some out-of-pocket expenses associated with this service, he may be able
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to deduct these expenses, even including expenses traveling to and from the charity
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So if you're spending your own money in pursuing providing services to a charity, you may be
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able to deduct those expenses, maybe even driving to and from. But providing that service to a charity is not something that's deductible
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Thus Alexander can claim the total $1,000 charitable contribution from the fair market
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value here and the deductible portion of these tickets. Okay, so we learned a lot about charitable contributions as itemized deductions in this video
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Let's go ahead and finish out by doing one more part of the Superfast CPA strategy, which
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is something called pillar topics. Now the idea behind pillar topics is essentially as you're going through the questions and
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after you've gone through the questions, you will notice the things that are obviously
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important and that you were supposed to learn based off of your review course
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These are the things that you saw three or four times throughout the questions, making
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it obvious that these were the things that you needed to know. So let's go ahead and look at the pillar topics
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So cash contributions are limited to 60% of AGI, ordinary income property donations such
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as like inventory items for sale or short term things are limited to 50% of AGI and
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property donations that are longterm are limited to 30% of AGI. And if all three of these occur in one year, here's the order again
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First is the cash contribution, 60% AGI limit, then the 50% AGI limit less the allowed amount
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from the 60% AGI limit. And then finally, the lesser of what remains from the 50% AGI limit after deducting the
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cash and the ordinary income allowed amounts or the 30% of AGI limit is what's taken for
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longterm capital gain items. So the lesser of that, and then whatever amounts are left over after that, and then whatever
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amounts are over the limits for the year are carried forward five years to be used
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Finally, services are not deductible. And remember expenses incurred while performing those services might be deductible and gifts
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to people and donations to political campaigns are not deductible. Okay. So those are some of the pillar topics that I pulled out from this video
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Maybe you thought of some other things, or maybe you want to add more detail to this
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Definitely do that for yourself. With all that said, that's the end of the video
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Thanks for watching. Be sure to go to superfastcpa.com and watch that free one-hour webinar
15:45
We teach the six key ingredients to passing the CPA exam. Also make sure to check out our SuperfastCPA app where we have five question mini quizzes
15:53
that you can take throughout the day to continually be learning from questions
15:57
I hope this was helpful and I'll see you in the next video
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