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Charitable Donations: Tax Deduction Considerations

Recently, many companies and individuals are looking to give back to their communities by contributing to charities. There are several income tax factors to consider when making a charitable donation.

Verify Qualifying Charitable Organizations

Prospective donors should verify that the organization is a qualifying charitable organization in the IRS database: https://apps.irs.gov/app/eos/.  These organizations have filed the required forms to be recognized under IRC section 501(c), which enables donors to such organizations to make tax-deductible contributions under IRC section 170.

Document Correspondence

It is important to keep bank records, receipts, and confirmation letters received from every charity to which you donate.  A charitable organization is required to send you written acknowledgment when a cash contribution exceeds $250.  If you contribute property other than cash that is valued over $500, then you are required to maintain additional information including:

  • Approximate date and manner of acquisition of donated property
  • Cost or other basis of donated property held by the donor

If the value of the property donation is greater than $5,000, you must also obtain a qualified appraisal.

The above documentation is required to support the tax deduction you claimed for the charitable contribution.

Deduction Limitations Vary Depending on the Donor:

C-Corporations
A corporation’s charitable deduction in 2019 is limited to 10% of its taxable income for the tax year.  For this limitation, taxable income is computed without the following:

  • The deduction for charitable contributions.
  • The dividends-received deduction.
  • The deduction allowed under IRC section 249 for bond premium.
  • Any domestic production activities deduction.
  • Any net operating loss carryback to the tax year.
  • Any capital loss carryback to the tax year.

Therefore, if the corporation is operating at a taxable loss, then the charitable deduction will be disallowed for tax purposes, and carried forward for 5 years.  Any unused carryover after the 5 year period would expire.

It is also possible for a charitable contribution carryover to be converted into a net operating loss carryover.  This occurs during a year when a company’s taxable income is completely offset by a net operating loss carryover.  The conversion of a charitable contribution carryover into a net operating loss carryover is a favorable result, as the net operating loss carryover period is unlimited for taxable years beginning after December 31, 2017.

For questions or further assistance, please contact a member of Withum’s Tax Group.

Corporations are eligible for an increased deduction for inventory used in the ordinary course of business.  Generally, the deduction is the lesser of the fair market value (FMV) or cost of the inventory.  Under IRC Section 170(e)(3), an increased deduction equal to the basis plus one-half of the property’s unrealized appreciation may be claimed, limited to twice the basis of the property.  The below qualifications must be met:

  • Used by the donee solely for care for the ill, needy, or infants
  • Not transferred in exchange of money, property, or services
  • Donor receives a written statement that donee will use the property as stated above
  • Certain other requirements apply to specific types of property.

Partnerships & S-Corporations
Partnerships and S-Corporations are considered pass-through entities, where the business income flows through to the individual partner or shareholder.  The deduction for charitable contributions is not limited at the entity  level; and instead, it is reported on the Schedule K-1 and the deduction is claimed by the partner or shareholder.

There is no additional deduction of inventory for partnerships and S-corporations, like there is for C-corporations.

Individuals
Individuals report charitable contribution on Schedule A as itemized deduction.  Charitable deductions flowing through from a Schedule K-1 are reported on Schedule A as well.  Therefore, if an individual’s total 2019 itemized deductions do not exceed the standard deduction ($12,200 for single filers / $24,2000 for married filing jointly), then there will be no tax benefit received for the donation.

In addition, there are limitations based on a percentage of the taxpayer’s Adjusted Gross Income (AGI).  In 2019, the AGI limitations typically are:

  • Contribution of property that would generate long-term capital gains property (e.g. stocks held for more than one year) – 30% of AGI
  • Noncash property (e.g. inventory) – 50% of AGI
  • Cash only – 60% of AGI

Noncash donations should be valued at the item’s fair market value, and should be reduced by the amount of benefits that the taxpayer receives in exchange for the gift.

CARES Act Changes

The CARES Act made several changes to charitable deductions including:

  • Above-the-line charitable deduction. For 2020, taxpayers are entitled to a deduction of up to $300 for cash contributions to churches and charitable organizations, but only if they take the standard deduction. (§2204)
  • Increased income limitation on charitable contributions.
    • Individuals: In 2020, an election can be made to limit certain cash contributions by individuals to 100% of AGI.
    • Corporations: For certain cash contributions in 2020, the 10% taxable income limit generally is increased to 25%.

Tax Planning Opportunities

Please consult with your tax advisors at Withum to help identify tax planning opportunities in regard to charitable giving.  By using the proper strategies, charitable contributions can reduce or defer income taxes, capital gains taxes, and estate taxes.

Author: Bryan Nachwalter, CPA | bnachwalter@withum.com

Business Tax Services

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