20 Apr S – Corp Charitable Donations
The most intriguing aspect of maintaining this tax blog is the pleasure of meeting and engaging a wide variety of successful people all with the courage to take the risk of venturing out on their own professionally in pursuit of dreams and aspirations. Sharing with me the lessons learned through experiences chalked up to enduring hard knock after hard knock I have learned from my readers and subscribers along the way of which I am profoundly thankful.
I couldn’t help but notice that many of my friends and clients alike, particularly those of you in the business of providing services to the community, have become successful beyond anyone’s wildest expectations and are now more prepared than ever to accept the significance of gifting in the greater scheme of life’s affairs. Because people that read my tax blog are smart however they want their gifts to both maximize a positive impact on the community but also offer the most tax advantages on the way. This is often referred to in my circles as intelligent gifting with purpose.
Most astute businesses are structured as Limited Liability Companies (LLC’s) and have elected to be treated as an S-Corporations for income tax purposes. Charitable contributions originating from S Corporations is nuanced and can appear at first somewhat complex to report but is fully legal and advisable. In order for expenses to be deductible as a charitable contributions they must be:
(1) un-reimbursed (aka not deducted elsewhere);
(2) directly connected with the services;
(3) incurred only because of the services provided; and
(4) not personal, living, or family expenses as defined under (Reg. Sec. 1.170A-1(g))
The Pension Protection Act of 2006 amended Internal Revenue Code Section 1367(a)(2) to provide that the decrease in shareholder basis under Internal Revenue Code Section 1367(a)(2)(B) by reason of a charitable contribution is equal to the shareholder’s pro rata share of the adjusted basis of the donation. This rule does not apply to contributions made in tax years beginning before January 1, 2006, and after December 31, 2013.
THIS IS WHERE THE RUBBER HITS THE ROAD!
For contributions made in tax years after December 31, 2013, the amount of the reduction is the shareholder’s pro rata share of the fair market value of the contributed property.
Example: Brian is the sole shareholder of Gymnastics Gym, Inc, an S corporation. Brian’s basis or investment in Gymnastics Gym’s stock is $1,000,000. In 2013, Gymnastics Gym made charitable contributions with a basis of $10,000 (basically the fixed and variable expenses of hosting gymnastics parties) and a fair market value of $20,000 (basically the usual or customary charge assessed to the general public or, more ideally, the amount acknowledged on the letter from the recipient charitable organization).
In this scenario Brian as a shareholder of Gymnastics Gym is treated as having made a 2013 charitable contribution equivalent to the cost basis ($10,000) of the donation. In 2014 on wards the donation value of the birthday parties will be the equivalent of the fair market value ($20,000) of the donation. Up until the end of tax year 2013 this charitable donation for income tax reporting purposes is generally treated as a cost of operating a business more so than a reduction in basis or investment in Gymnastics Gym stock.
If that same charitable contribution were to be made in 2014 however then Gymnastics Gym would deduct as ordinary operating expense the $10,000 cost of hosting gymnastics parties. Additionally Brian as the sole shareholder of Gymnastics Gym could choose to take up to the difference between the $10,000 deductible operating costs and the $20,000 Fair Market Value (FMV) of the gift (or $10,000) as a pass through charitable donation by reducing his basis in Gymnastics Gym stock dollar for dollar with the amount of claimed charitable donation.
How to report: Gymnastics Gym incurred usual and customary operating expenses to host birthday parties that happened to be donated to a charitable organization. These expenses are included on the income statement and offset gross receipts in arriving at net income. Separately and distinctly from that, Brian as a shareholder of Gymnastics Gym has a basis or investment in his shares of Gymnastics Gym.
The charitable donation amount of the parties (after accounting for operating expenses as you need to take care to not double dip on expenses) passes through Gymnastics Gym’s 1120-S via line 12.a. of Schedule K which carries over to box 16 schedule K1 labeled as ‘C’ (reduction in basis) and then carries to his personal 1040 Schedule A as part of his itemized deductions.
Caveat 1: Charitable contribution deductions on the 2013 1040 Schedule A (regardless of where they originate) begin to phase out when Adjusted Gross Income (AGI) exceeds $300,000 for married taxpayers filing joint returns so be sure to run the phase out calculation found in IRS Publication 526, Charitable Contributions.
Caveat 2: Special rules of Internal Revenue Code Section 170(e) should be considered in other files you take on in these regards but the application is narrowly specific.
It was difficult for me to wrap my arms around the concept at first and subsequently compiled the following facts.
Generally the value of a taxpayer’s time or services is not deductible as a charitable contribution according to Treasury Regulation Section 1.170A-a(g).
However, according to Parker Tax Publishing un-reimbursed expenditures made incident to rendering services, such as for example hosting a gymnastics party, the contributions to which are deductible, are indeed deductible contributions according to TC Saltzman v. Comm’r, 54T.C. 722,(1970); AND Babilonia v. Comm’r, T.C. Memo. 1980-207.
Most importantly though the expenses of rendering services are deductible because they constitute contributions “to” the charitable organization according to Rockefeller v. Comm’r, 676 F.2d 35,(2d Cir. 1982).
In conclusion in 2014 forward you can claim the Fair Market Value of of any charitable deduction out of your S-Corp as a pass through by offsetting it against basis after backing out the corporation’s cost of making the charitable donation.