Equipment Appraisal Blog | Understanding Machinery Appraisals

We see many instances where business owners and individuals no longer need to operate used machinery or have recently acquired older equipment and personal property as part of a larger purchase or estate settlement. In any of these cases, the assets are no longer useful, and there becomes a need to decide the best option for transferring ownership.

The first thought is usually determining the ability to sell or liquidate the assets; however, this process may be difficult, especially if demand is limited or the owner is unfamiliar with the potential resale markets. As an alternative, donating the property to a local business, university, training school, or non-profit organization might be a better choice. The benefits of a tax deduction and supporting your community or alma mater might outweigh the uncertainty and time-consuming process of trying to sell the items on your own.

Before you decide which options are best, it is a good idea to consult with your accountant as well as an accredited professional appraiser, especially if you know the total value of the donation will be significant. The IRS rule is that an independent appraisal is required as part of any deduction claim in excess of $5,000. You must also include Form 8283 as part of your income tax filing. The form needs to be signed by you, the appraiser, and the party you are donating to.

The cost of the appraisal can sometimes become a challenge in comparison to the tax benefit. For example, suppose you have dozens of small items that are being donated together, and all need to be appraised. In that case, the total value might not support the cost given the valuation process will be time-consuming. You need to broadly calculate your expected tax deduction by approximating the total value of your donation and multiplying it by your estimated adjusted income tax percentage.

As an example, a $50,000 donation would result in a $10,000 deduction for someone in the 20% tax bracket. If the appraisal costs $5,000, you will end up with a $5,000 overall benefit for the donation. A lower overall value for your donation will create a more price-sensitive situation regarding the appraisal cost, and vice versa.

It is important to review and discuss these scenarios with your accountant and the appraiser to try and create an affordable option that makes sense for you. Grouping together some of the less expensive items for the purpose of valuing them might be one viable way to save on the time and cost of completing the appraisal. The focus can then be placed on the higher-valued property for the purpose of detailing and itemizing the report.

When your business is looking to acquire new equipment, one of the primary reasons that necessitate this is the need to replace older machinery and upgrade your company’s production capabilities. Your first instinct may be to trade in or resell your used assets, however, another effective option is to donate them to a local non-profit, such as a public school/university, hospital, research institute, charity, museum, or other tax-exempt organization.

Consider researching options locally or contact your old schools to see if they would be interested in acquiring the used equipment which they might utilize directly or be able to refer you to a facility they know might have an interest.

The benefits to this type of transaction are not only from an income tax deduction perspective but you can also provide goodwill for your business. You may also be helping another facility and the individuals they support by providing items they might not be able to afford otherwise. Scientific, medical, and technical research and education at the high school and college levels are areas that usually need resources to maintain and grow their foundations.

Before physically donating, make sure you check that the equipment is in good working order while cleaning it up and creating an itemized list of what you will be providing to the non-profit organization. This list will come in handy when filing your taxes as well.

If you know the overall value of your donated machinery will exceed $5,000, you will be required to obtain an appraisal to support the higher claim. The advantage you have here is that the price level will be measured at fair market value, which is very likely higher than any trade-in or resale price you might get from an equipment dealer if you tried to sell on your own.

>Look to engage with an experienced accredited appraiser who is familiar with the type of assets you are donating. Donation valuations are very common for equipment appraisers, and they can provide the support needed to ensure you receive a reasonable assessment of value.

Once the appraisal is completed, you will need to fill out an IRS form 8283 for noncash donations and have the appraiser review and attest to the reported value. You can submit this as part of your overall tax return.

Donations can also be completed for unused inventory such as spare parts and tooling. Companies that produce excess finished goods can also donate these items using the same process. Equipment appraisers with experience in valuing inventory can work with you on these types of donations as well. In summary, before you decide to resell your used machinery when replacing them with newer models, consider a donation as a more effective alternative.

When you are considering donating equipment for tax purposes, no matter how much or how little you can afford to give, it usually goes toward a worthy cause and makes you feel good in the process. Many people donate cash while others choose to make a donation of property or equipment.

While giving is its own reward, the IRS also rewards those who make charitable contributions to qualified organizations. As long as you meet certain guidelines and follow basic rules, you will be able to take a deduction on your tax return for the fair market value of your donation.

Claiming a Deduction for Donated Equipment or Machinery

Individuals, partnerships, and corporations are all eligible to claim a tax deduction on their tax return for donated property such as machinery & equipment. If you donate these tangible assets, and believe the value will be in excess of $500, you are required to fill out IRS Form 8283 (Non-Cash Charitable Deductions). On donations above $500, but no more than $5,000, you need to fill out Section A of Form 8283 but likely will not need to provide an equipment appraisal supporting the value. For donations where the value exceeds $5,000, you are required to fill out Section B of Form 8283 and you will need to provide an appraisal.

The IRS does not necessarily think everyone will overstate the value of their donation so they can claim a bigger deduction, but they must be able to document larger transactions using a reasonable process of independently valuing the property. The IRS generally does not question donations under $500, but you should keep records/receipts of all charitable gifts just in case they do. An equipment and machinery appraisal is required on more highly-valued items because the potential to overstate can materially reduce the amount of revenue the agency receives. 

In most cases where you need an appraisal, you do not need to attach it to Form 8283 and submit it with your return. An exception would be if your claimed donation is over $500,000. Keep the appraisal in your records just in case the IRS questions the amount of the claimed deduction.

Who is a Qualified Appraiser?

Equipment value established by an accredited equipment appraiser is more likely to be accepted as accurate by the IRS. An accredited equipment appraiser has the experience, education, and ability to perform an equipment & machinery valuation by following generally accepted appraisal standards. Accredited equipment appraisers are so designated by the American Society of Appraisers (ASA) and are compliant with the Uniform Standards of Professional Appraisal Practice (USPAP).

In summary, do not try to save a few dollars by hiring the cheapest appraiser you can find. You should always look for an accredited equipment appraiser who has the credentials to complete a supportable assessment of your donated equipment values. Using an appraisal company that only hires accredited appraisers is the best way to assure you will receive the best bang for your buck and feel confident that you're receiving the most benefit from donation.

When you're trying to help out a community organization or charity, a donation of equipment can be a great way to help fill their coffers or provide them with equipment that moves their mission forward. However, when it comes time to deal with finances and taxes, sometimes you need to have a bit more paperwork available than a receipt from the organization in question to document value. During those times, a donation appraisal is often the best way to verify value and provide documentation for tax agencies to back up that value. Here's a quick overview of how the donation valuation process works and in what situations it's most necessary.

How does a donation appraisal work and how can it benefit your finances?

With the changes that have happened recently in the tax code and new tax reform bill, many businesses are concerned about how their donations to charities will work out financially in the future. Fortunately, many of the issues surrounding donations are still somewhat similar to past years. However, if you're considering trying the new tactic of bunching your donation of a large value of equipment into a single year and then coasting through the next several years before your next donation, you'll need to make sure you're able to solidly document the value of your equipment.

But what about tax agencies? If the equipment you're donating is $5,000 or more in value, the IRS requires that you have an appropriate appraisal performed to document the value. What's considered an appropriate or qualified appraisal? Most tax agencies, not just the IRS, will happily accept an equipment appraisal that is performed by a certified appraiser. Why? Because this type of appraisal uses a set of standardized methodologies that have already been tested in a wide range of situations. This means that they've been perfected into methodologies that are accepted by tax agencies, financial institutions, legal circles and insurance companies.

What if you have already donated the equipment during this past year in anticipation of the new tax laws? If you didn't have the opportunity to have the machinery appraised at the time, it's not too late to have an appraisal performed. The methodologies that were mentioned earlier include developing calculations that work well for past values. These values have been used in a wide range of other situations, including insurance losses due to natural disasters, changing market conditions and similar situations. This allows a certified equipment appraiser to look back through time to the situation and conditions under which the donations took place as well as any mitigating circumstances such as cost of removing the equipment from your facility and who bore the burden of that expense.

If the machinery you're donating has a value anywhere near where the cutoffs for the tax agencies you're dealing with, a donation appraisal is a vital part of the process. Fortunately, when you're working with a certified equipment appraiser, you can even have the equipment you've already donated appraised as of the date of its donation, making it easier to deal with tax agency issues that you may have missed at the time of the donation. Working with a certified appraiser ensures that the methodology used in calculating value will be accepted by tax agencies and courts of law if necessary.

Oops! When you've made a donation, are involved in litigation or have had an insurance loss, there's nothing quite as concerning as realizing that you needed to have equipment appraisals performed after the fact. How do you fix this problem? In this article, we'll discuss retrospective appraisals and how they can help you get the documentation you need to fix these troublesome problems. Here's how:

Documenting Donations

One of the most common areas where retrospective appraisals are used is in donations to non-profit or not-for-profit organizations that were not properly documented at the time. Especially when you're looking at taking a tax break for the donation, you need to have documentation to take the deduction. If the documentation was not prepared at the time of the donation by an equipment appraiser, it can be really difficult to otherwise prove the value of the equipment you donated. But at the end of your business year, your accountant informs you that they need you to provide supporting documentation for your donation. If you're stuck in this bind, you can still save the deduction by having a retrospective equipment valuation performed by a qualified machinery appraiser.

Proving Litigation

Another area where retrospective valuation can come into play is in litigation. One example of this is when going through a divorce where you need to buy out your spouse's interest in the business or prove that you're not hiding assets. Your spouse  may claim that you're undervaluing equipment that you've sold to keep things solvent while the transition is underway, because they want to get everything they can out of the buy out. A retrospective equipment valuation helps prove that your equipment was worth a particular amount prior to being sold, documenting that you were not hiding or undervaluing business assets.

Insurance Loss

When you've suffered a loss that sets your business back, it's upsetting when you realize you don't have documentation of your equipment values. Whether you're dealing with the fallout of a storm, a fire or a theft, documenting the value of your equipment is a vital part of the claim process. If you didn't have a machinery valuation performed ahead of time, you may be having a difficult time proving what the equipment was actually worth, especially when the equipment was customized or has unusual features that your insurance adjustor isn't familiar with. A retrospective machine appraisal helps prove the exact value of the machinery when the loss took place.

Tax Issues

What about when you're dealing with a tax agency? Equipment can lose value quickly at times, especially if it is in a struggling industry or when technology quickly changes. When a tax appraiser doesn't have a solid grip on the value of the machinery you own and just uses accounting depreciation, it's difficult to prove your side of the appeal without documentation. A retrospective valuation helps prove that the machinery was worth looking at market conditions, the condition of the equipment and similar elements that affect your machinery's final value.

If you find yourself needing to do the time warp to prove equipment values, a retrospective equipment appraisal can help document past value. At Equipment Appraisal Services, our job is helping you document equipment values, even after the fact. Please contact us today for help with your retrospective machine appraisal.