charitable

Business charitable contribution rules have changed under the CARES Act

In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:

The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).

What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.

The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants.  

“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.

Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.

What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

CARES Act questions

Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.

© 2020

Common Tax Questions and Answers for Individuals

Q: Who is required to file a 1099-Misc?

You must file a Form 1099-MISC for each person/vendor you have paid at least $600 in any of the following categories unless the payment was made to another business that is incorporated, but not for medical or legal services:

  • Rents/Royalties
  • Services
  • Prizes and Awards
  • Medical and Health care payments
  • Attorney’s fees.

You are required to have on file a completed Form W-9 for any vendor to which you pay $600 or more (by cash or check) for services in a calendar year. Although most corporations are exempt from receiving a 1099 (with the exception of attorneys and some health care providers), you must still have a Form W-9 on file to confirm entity type. We encourage you to collect a completed form before you release payment to a vendor. You are not required to get a new form from each vendor every year. However, you are required to confirm each year that the information has not changed.

If you have requested a Form W9 and have not received a completed form from a vendor, please request a copy of the Form W9 again, in writing, and keep a copy of the request as proof of your due diligence. If you are still paying this vendor for services, and they have neglected to provide a W9 when asked, you are required to withhold 24% backup withholding from future payments. The vendor may be subject to a fine from the IRS if they refuse to provide a form W-9. However, the IRS looks to the payer as the party responsible for collecting and retaining the Form W-9, or carrying out the required withholding and reporting, and may impose fines and penalties for failure to do so.

If you own rental property reported on Schedule E of a 1040, it is essential you file the required 1099’s to establish that your rental is a trade or business.  This is necessary in order to take full advantage of tax deductions like 199A created by the Tax Cuts and Jobs Act .  Consult your tax advisor for further details or questions.

Q:  Does it make sense to file Married Filing Separate instead of Joint?

A:  In a community property state, the answer is likely no.  Salaries and Wages by either person counts as community income and is split 50/50.  That coupled with elimination of several credits due to filing separate usually means this isn’t a good choice.

In a non-community property state, it can make sense if joint income creates a higher tax bracket.  Filing separate can also help taxpayers that itemize as the limits are often percentages of gross income.  For example, medical is only deductible if the costs exceed 10% of adjusted gross income.  Filing separate lowers the limits.  Consult your CPA to see if it makes sense in your tax situation.

Q:  Are there penalties for filing an extension?  Is filing an extension bad?

A:  Filing an extension gives you 6 additional months to file a personal income tax return.  However, it does not give you an extension to pay your taxes.  You must send payment for 100% of taxes owed on April 15th, or you face a failure to pay penalty of .5% a month on the unpaid balance.

Q:  I just started a small schedule C business, what are some common expenses I can take a deduction for?

A:  Besides the normal business expenses, which are easily tracked like property taxes, rent, dues and subscriptions, supplies, etc., a very common business expense that requires a little additional tracking is automobile expenses.  The standard mileage rate for 2019 is 58 cents for each business mile driven.  The IRS requires a travel log to support your business miles, which should include dates of business trips, starting points and destinations, business purpose of trip, starting and ending mileage, tolls or any other trip related costs.  Alternatively, you can choose to use actual vehicle expenses instead of the standard rate, which can include gas, depreciation, repairs and maintenance, etc.

Q:  Are my charitable donations or medical expenses deductible?

A:  Although your charitable donations are likely 100% deductible up to 30% or 60% of your adjusted gross income depending on charitable organizations, you might not actually be getting any tax benefit.  Charitable donations are an itemized deduction so you only get a tax benefit if you choose to itemize rather than taking the standard deduction (12,200 for single and 24,400 for married filing joint for 2019).

Similarly, medical expenses are also itemized and must be over 10% of adjusted gross income in 2019 before they provide any tax benefit.  If all your itemized deductions in total are under the standard deduction amount, you will receive no tax benefit for having these expenses.

Q:  Are Cryptocurrencies taxable with the current tax law?

A:  Yes.  Even if no 1099 was issued, the IRS required you to self-report any capital gains and track your own cost basis in 2018/2019.  The IRS has been sending out thousands of letters to potential cryptocurrency sellers for failing to pay required taxes.

 

Contact us for further information and assistance.

Tax Efficient Charitable Giving

by Joe Ben Combs, CPA

Tax Manager at Atchley & Associates, LLP

As we all know there are tax benefits associated with donating to charities, religious organizations, universities, etc. We have written in the past about the basics of charitable contributions but we thought it would be good to take it to the next level and share some of the more sophisticated ways we help our clients maximize the tax benefits of their charitable giving. We’ll start with the simplest ideas first.

  1. “Bunching” contributions. You may be familiar with the concept as it is often applied to property taxes. The idea is that if you accelerate next year’s giving into this year (bunching multiple years’ deductions into one year) you can get both deductions this year and then next year you can take the standard deduction that have otherwise been wasted. It’s something I personally have taken advantage of on multiple occasions but it certainly doesn’t make sense for everyone. There are a host of factors that may limit the benefits so it’s definitely worth a quick conversation with your CPA or financial advisor before pulling the trigger.
  2. Qualified charitable distributions. A QCD is a distribution directly from your IRA to a qualified charity. You will not get a deduction for the contribution but the distribution is also not included in your income, which usually yields a better result than if you were to take a taxable distribution and then deduct the charitable contribution. What’s even better is these distributions can be used to satisfy your annual required minimum distributions (RMDs). It is a highly tax efficient way to give to charity. However, there are two major limitations. First, you must be at least age 70 1/2 to make a QCD. Second, the maximum amount you can distribute as a QCD is $100,000 per year.
  3. Donation of appreciated stock. This is one of the most powerful and underutilized charitable giving strategies available. Let’s look at an example to illustrate. Assume you intend to donate $100,000 to a charity. You currently hold a stock that you purchased for $60,000 and now happens to be worth $100,000. You could sell the stock and donate the $100,000 to charity, creating a taxable gain of $40,000 (and a tax hit of $6,000 of tax, assuming a 15% capital gains tax rate). Or you could donate the stock directly to the charity. If you do this, the tax rules allow you to take the same $100,000 deduction as if you had donated cash but avoid recognizing the capital gain. One thing to keep in mind – this strategy cannot be used to avoid short term capital gains as the contributed property must be held for more than a year.
  4. Donor advised funds. A donor advised fund (DAF) essentially functions as a charitable giving account. You are allowed a tax deduction when you contribute to the fund. Once the funds are in the account they are legally no longer in your control but you are allowed to give instructions (technically grant recommendations) to the organization managing the account about how to distribute the funds. They will often even allow you to select how the funds are invested while they are in the account so they continue to grow. This is a great way to manage your charitable giving and can help to facilitate some of the strategies already mentioned. For example, if you want to bunch your contributions this year but you don’t know which charity you want to give to or you just don’t want to give it all right now, you can contribute to your DAF and decide later where and when to distribute the funds. Or let’s say you want to donate a piece of appreciated stock but the organization you want to donate to does not have the structure in place to receive stock donations. You can contribute the stock to your DAF, the DAF will sell the stock, and you can direct the cash proceeds be donated to the charity. DAFs are also a useful tool for those who want to contribute anonymously.
  5. Charitable trusts. There are a variety of trust arrangements that can be used – usually as estate planning tools – to accomplish your charitable goals. We won’t go into all the particulars here but these usually involve a noncharitable beneficiary receiving income for a certain period of time (generally his or her lifetime) and a charitable beneficiary receiving the remainder, or vice versa. Charitable trusts are a good option for those with substantial wealth looking to retain income for their lifetime, maintain control over charitable assets, or create a more flexible plan of disposition for their assets that includes charitable and noncharitable goals. Needless to say, consultation with your CPA and/or attorney is highly recommended before pursuing this option.
  6. Private foundation. For those with substantial wealth who are interested in creating an ongoing charitable operation, a private foundation may be the solution. While these can be expensive to create and maintain, they provide opportunities that none of the previous strategies do. For example, if you are interested in providing free tutoring to underprivileged children in an area that is not served by any other organization, you can create a foundation that does just that. You can claim a tax deduction for contributions to the foundation, maintain control of the operational aspects, and involve friends or family members in the leadership of the organization if desired. Of course there are numerous tax, legal, and administrative considerations to be discussed with your CPA and attorney before going down this road.

Tax Exempt Organizations Disaster Relief Written Acknowledgements

by Karen Atchley, CPA

Partner at Atchley & Associates, LLP

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 was signed into law on September 28, 2017 (hereafter referred to as The Disaster Tax Relief Act).  The legislation provides tax relief to the victims of Hurricanes Harvey, Irma and Maria and funds the Federal Aviation Administration through March 2018.

Although this new law affects individuals and employers, the purpose of this paper is to advise tax exempt organizations concerning one specific area of the new law relating to issuance of charitable contribution acknowledgement letters.  The law added a temporary suspension of the adjusted gross income (AGI) limitations that are imposed on qualified charitable contributions. The taxpayer must make an election for the temporary suspension of the AGI limitations to apply.

 In general, the law prior to the September 28, 2017 legislation provides that individual’s cash contributions are deductible in any one year up to 50% of AGI and noncash contributions are deductible in any one year up to either 20% or 30% of AGI.  Contributions limited by AGI are carried forward to subsequent years for up to five years.

A qualified charitable contribution under the new law is a contribution that was paid during the period beginning August 23, 2017 and ending on December 31, 2017, in cash to an organization described in section 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas.  The contribution must be substantiated with a contemporaneous written acknowledgement from the charitable organization that states that the contribution was or is to be used for relief efforts.

Most charitable organizations are aware of Internal Revenue Code (IRC) Section 170(f)(8)(A), which requires that the organization must provide the donor with a written acknowledgement of the donor contribution if the contribution was for $250 or more.  IRC Section 6115 requires the charitable organization to provide the donor with a written statement if a contribution is made for $75 or more if part of the contribution is for goods or services (quid pro quo) and the statement must contain a good-faith estimate of the value of goods and services that the charity has provided to the donor.  What charitable organizations may not know is that The Disaster Tax Relief Act requires written acknowledgement that not only states that the contribution was or is to be used for relief efforts but also requires a letter to the donor regardless of the size of the contribution.

In summary, charitable organizations that collected funds that were collected during 2017 and used in the relief efforts in the Hurricane Harvey, Irma or Maria disaster areas will want to start working on their acknowledgement letters for 2017 early in 2018 since all qualified relief contributions require an acknowledgement letter.

Note: Regulations may subsequently be issued that affect this provision of the tax law.  Check with your tax advisor to determine whether any subsequent tax law changes are made.  This paper is not intended to address all the provisions of The Disaster Relief Act but only the provision relating to the issuance of written acknowledgements.

3 breaks for business charitable donations you may not know about

Donating to charity is more than good business citizenship; it can also save tax. Here are three lesser-known federal income tax breaks for charitable donations by businesses.

  1. Food donations

Charitable write-offs for donated food (such as by restaurants and grocery stores) are normally limited to the lower of the taxpayer’s basis in the food (generally cost) or fair market value (FMV), but an enhanced deduction equals the lesser of:

  • The food’s basis plus one-half the FMV in excess of basis, or
  • Two times the basis.

To qualify, the food must be apparently wholesome at the time it’s donated. Your total charitable write-off for food donations under the enhanced deduction provision can’t exceed:

  • 15% of your net income for the year (before considering the enhanced deduction) from all sole proprietorships, S corporations and partnership businesses (including limited liability companies treated as partnerships for tax purposes) from which food donations were made, or
  • For a C corporation taxpayer, 15% of taxable income for the year (before considering the enhanced deduction).
  1. Qualified conservation contributions

Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions is increased from the normal 10% of adjusted taxable income to 100% of adjusted taxable income.

Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years.

  1. S corporation appreciated property donations

A favorable tax basis rule is available to shareholders of S corporations that make charitable donations of appreciated property. For such donations, each shareholder’s basis in the S corporation stock is reduced by only the shareholder’s pro-rata percentage of the company’s tax basis in the donated asset.

Without this provision, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount than the shareholder’s pro-rata percentage of the company’s basis in the donated asset). This provision is generally beneficial to shareholders, because it leaves them with higher tax basis in their S corporation shares.

If you believe you may be eligible to claim one or more of these tax breaks, contact us. We can help you determine eligibility, prepare the required documentation and plan for charitable donations in future years.

© 2017

Charitable Contributions

Whether you make your gifts during this season of giving, or spread your charitable giving throughout the year, good record keeping is essential to making sure that you can qualify for the full charitable contribution deduction allowed by IRS.

First, you must be sure that the organization is eligible for a tax-deductible donation. The IRS offers Select Check an online search tool that you can use to verify that you are giving to a qualified organization. Places of worship are also eligible, but not included in this database. Gifts to individuals, political organizations or candidates are not eligible.

You must have documentation for all charitable gifts. See the table below for guidelines according to what type of donation you make.

Charitablecontributions

Vehicle donations require special reporting requirements. Contact your tax professional for details before make your donation.

You need to have all of your acknowledgements in hand before you file your tax return. So now is the time to check your records and contact the recipients if you need statements. Atchley & Associates is happy to answer any questions you have regarding charitable donations deductions and your specific tax situation.