Question: Is custom software that is donated to a 501(c)(3) charity deductible? What about the data that goes with the software?
An important principle when considering the donation of intellectual property is that for the gift to be deductible, the donor must transfer all substantial rights in the intellectual property such that the donation would be considered to be a complete assignment of all rights. That is, one cannot merely let the charitable organization use the intellectual property. The organization must, for all intents an purposes own the intellectual property.
Rights in software are generally based on copyright. In general, for the donation of a copyright to be deductible, both the tangible item and all rights in the copyright must be transferred. This is referred to as an assignment, rather than a license. Software that is purchased at the store wouldn’t qualify for this treatment. Prepackaged software is generally licensed to the purchaser. Therefore the purchaser could not transfer the copyright, since the purchaser of prepackaged software most likely does not own the copyright. Additionally, there may be some limitations on the purchaser’s ability to transfer the license in the software.
Similarly, a compilation of data may be intellectual property classified as a trade secret. Similar principles would apply. That is, the donor would have to transfer the data and all rights in the trade secret and its use.
The correct deductible amount for the donation of the intellectual property is the fair market value less any gain that would have been realized if the property had been sold at its fair market value on the date of the donation.