How Does the IRS Describe "Needy" for Clients of 501(c)(3) Organizations?

by Elizabeth Rayne
How does the IRS define

How does the IRS define "needy"?

Digital Vision./Digital Vision/Getty Images

The IRS allows deduction of in-kind donations to all 501(c)(3) charities. However, for charities that serve "needy" individuals, taxpayers are allowed to take an increased deduction for their in-kind donations. It is essential to understand how the IRS defines this term in order for the individual taxpayer to determine whether he may take an enhanced deduction for his donation.

Ready to incorporate your business? Get Started Now

In-Kind Donations

An in-kind donation is a donation other than cash. It can be goods or services; however, only donations of physical property may be tax-deductible. The value of your time or service, although much appreciated by the organization, is not deductible. View IRS Publication 526 (see References) for more information about what charitable contributions are tax-deductible.

170(e)(1) In-Kind Donations

Both individuals and corporations can deduct contributions made to 501(c)(3) organizations under Internal Revenue Code 170(e)(1). The value of the donation, for deduction purposes, is determined by how much the donor paid for it, even if the property had increased in value between the time of the purchase and the donation.

Enhanced Deduction

On the other hand, if a donation meets the requirements of 170(e)(3), the donor may take an enhanced deduction for the full fair market value of the donated property. In addition to the standard requirements for deductible contributions, there are four requirements that must be met in order to take the increased deduction: (1) the donated property must be used solely for the care of the ill, needy, or infants, and a third party may not use the property unless incidental to the care of the ill, needy or infants, (2) the donation may not be in exchange for money, property or services, (3) the donee must submit a written statement that the above requirements are met, and (4) the property must comply with FDA laws, if applicable.

Care of "Needy" Defined

The IRS defines a "needy" person is one who "lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress." Reg. 1.170A-4A(b)(2)(ii)(D). Further, the "care" of the needy consists of "alleviating or satisfying a particular need." Reg. 1.170A-4A(b)(2)(ii)(E). Thus, if a 501(c)(3) organization serves the needs of the impoverished, donors of in-kind donations may take an enhanced deduction.