Bargain Sale Tax Deductions vs Tax Credits

Welfont is a boutique commercial brokerage company that focuses on helping our clients find, analyze, finance, purchase, manage and sell commercial real estate properties. We specialize in representing real estate investors and tax-exempt institutions. Welfont Joe Johnson is the CEO of the company.
Often participants considering the IRS Section 170 Bargain Sale confuse whether the value of the property minus the cash received is a tax deduction or credit. In fact, many people often confuse tax deductions and credits and their principles. Yes, the main goal of both credits and deductions is to lessen the amount of taxes paid. However, bargain sale tax deductions and credits are assessed in different ways.

First, the Bargain Sale is a type of transaction that allows the seller to dispose of performing, underutilized and distressed assets by selling to a federally-approved nonprofit. A qualified appraiser places a valuation on the property consistent with the regulations specified in IRS Publication 561. The seller receives a deduction based on the appraised value minus cash received at closing.

No Tax Credits in Bargain Sale

It is important to note that the value of the asset in a Bargain Sale after cash received is used as a deduction. It is not a credit. According to the Internal Revenue Service, tax deductions lower your taxable income, and they are calculated using the percentage of your marginal tax bracket. For example, if you are in the 25% tax bracket, a $1,000 tax deduction saves you $250 in tax (0.25 x $1,000 = $250).
Marginal tax rate is the tax rate that will apply to the next marginal – or incremental – amount of income (or deductions). It is calculated by dividing the amount of additional taxes that will be due (or reduced) by the amount of income involved. The marginal tax rate is often the same as the individual’s tax bracket, but not always.
Taxable income is the amount of income used to calculate an individual’s or a company’s income tax due. Taxable income is generally described as gross income or adjusted gross income minus any deductions or exemptions allowed in that tax year.

Types of Deductions

There are two main types of tax deductions: the standard deduction and itemized deductions. A taxpayer must use one or the other, but not both. It is generally recommended that they use the itemized deductions if their total is greater than the standard deduction allowed by the IRS each year.
For those who use the itemized deductions process, it is important to keep detailed records that may include property taxes, charitable donations, mortgage interests, etc. It is also important to realize that certain itemized deductions are based on a minimum or floor amount. This means deductions can only be made in amounts that exceed the specified floor. For example, if the adjusted gross income exceeds a certain level, then a portion of the itemized deductions is not permitted.

A Look at Tax Credits

As for tax credits, they provide a dollar-for dollar reduction of income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes. However, tax credits cannot reduce your income tax liability to less than zero. In other words, your gross income tax liability is the amount you are responsible for paying before any credits are applied. Some examples of business tax credits include Rehabilitation Tax Credit, Reforestation Tax Credit, Business Energy Tax Credit, and Alcohol Fuels Tax.
Therefore, to determine if tax deductions or credits are better, the Bottom line depends on the tax situation and the kinds of saving that can be claimed. Ultimately, the IRS Section 170 Bargain Sale can only provide tax deductions.
The U.S. Tax Center’s publication provides further clarity about the differences between credits and deductions.

Welfont Can Help

To learn more about the use of the IRS Section 170 Bargain Sale and its tax deductions, please visit Welfont at https://www.welfont.com. You can also get in touch with us via email at info@welfont.com. Welfont Joe Johnson can help provide explanations for clients to show why the Bargain Sale can be an effective approach for taxes.
We are experts with every facet of the Bargain Sale. We work with a stable of stakeholders from every stage of the process:  sellers, brokers, CPAs, nonprofits and new buyers or investors. While helping its clients get the most for their ROI, Welfont manages investments from the research phase through the acquisition and disposition.

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