When something sounds too good to be true, it probably is. No, buying a Rolex is not a deductible charitable contribution.
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Why do people think buying a Rolex is tax deductible?
Rolex watches are made by the Swiss company Rolex SA, but the company is wholly owned by the Swiss charitable organization Fondation Hans Wilsdorf. Hans Wilsdorf was the found of Rolex, and he left all of his shares in the company to the foundation. The foundation’s purpose is to keep the company running, provide for the founder’s nieces and nephews, and further other charitable activities.
Because Rolex is owned by a foundation, people argue that buying a Rolex is a charitable contribution.
Is Rolex a qualifying charitable organization?
Rolex and the Fondation Hans Wilsdorf are not qualifying charitable organizations for two reasons.
First, donations to foreign organizations are generally not deductible. The primary exception is certain Canadian, Israeli, and Mexican charities in accordance with tax treaties with those countries. Note that foreign in this context means where the organization is legally based, so an American charity that uses the money abroad can still be a qualifying charitable organization.
Second, the organization must be organized and comply with an eligible section of federal not-for-profit law. The most common example is a 501(c)(3) charity. The law generally bars a qualifying organization from providing a share of its earnings to any private shareholder or related individuals. The fact the Fondation Hans Wilsdorf provides funds to family members means it almost certainly wouldn’t be a qualifying charitable organization.
It’s not a charitable contribution if you receive something in return.
Even if Rolex was a qualifying charitable organization, you wouldn’t be able to deduct the purchase price of the watch. When you receive something of value in return for your contribution, what you’ve really done is made a non-deductible purchase.
The exception to this rule is if you overpay. In that case, you wouldn’t be able to deduct the fair market value of what you received but you could deduct the overpayment.
In the case of Rolex, if you buy a watch for $10,000 at retail, the fair market value of that watch is considered $10,000, and you receive no deduction. However, if you bought that same watch in a charity auction for $15,000, you could use the retail price to say that you only received $10,000 in return and can therefore deduct the extra $5,000 as a contribution to the charity.
What if a buy a Rolex through my business?
In order to be deductible, a business expense has to be ordinary and necessary. For example, a restaurant has to buy plates and forks for its customers to eat with, so it can deduct the plates and forks.
It would be virtually impossible to argue that you need a Rolex to operate your business. While a business may need a timekeeping device and doesn’t have an obligation to go with the cheapest item, a Rolex would still likely be out of the ordinary.
If you were to buy a Rolex to give to an employee as a gift or bonus, it would likely be deductible to the business a compensation expense but taxable to the employee as income.
In short, buying a Rolex is not a clever way to receive a tax deduction.