By Nate Rothbauer
Manager, Moss Adams LLP
Charitable giving often comes to mind around the holidays when many are inspired to help the needy or fund a worthy cause. While reducing taxes is not the main reason many of us give, donations can certainly help a company’s bottom line. However, business owners need to understand the rules for tax-deductible charitable contributions, which, like taxes in general, can get pretty complicated.
That’s why it’s important to establish a corporate gifting strategy to ensure not only that IRS corporate gifting rules are followed, but also that the charitable organizations your business selects put donations to good use.
If you don’t already have a strategy, here are a few tips to help you get started.
Establish your priorities. After highlighting causes important to you, you’ll want to identify bona fide charitable organizations that are tax-exempt so contributions can be deducted. Sites such as charitynavigator.org can help. Then consider how much you can donate in terms of time and money. If you want to donate assets other than money, consider what forms they will take. You’ll also want to decide whether to disclose your identity or remain anonymous.
Make giving part of your business plan. Understanding tax limitations on charitable deductions can help your company make the most of the amounts you gift. While your company can make any amount of contributions, the IRS limits deductions at 10 percent of net taxable income. Contributions above 10 percent can be carried over into future years. For flow-through businesses, such as an S corporation, partnership, or LLC, the limitation is determined on the owner’s tax return and could be up to 30 or 50 percent of income.
Document the value of your charitable activities. This includes any in-kind donation of services or products, which may also qualify as a tax deduction. Reporting on charitable activities to employees and other stakeholders demonstrates your commitment and appreciation. Charitable activities can help distinguish your company in the business community as well as among the competition, which also helps your company stand out as a potential employer.
Explore future opportunities and long-term business plans. If you plan to eventually sell your company or transition ownership interests, you’ll have a major opportunity to increase your charitable activities. Business ownership interests fuel your personal net worth, so a change in ownership status can present new opportunities to reduce your income and estate tax liabilities while increasing your charitable contributions. Examples of popular gifting strategies available during a “liquidity event” (such as selling one’s business) are donor advised funds, private foundations, and charitable remainder trusts.
A few additional things to keep in mind as you establish your plan:
• S corporations can deduct the fair market value of appreciated assets contributed to charity, which reduces the shareholders’ basis in the S corporation by the assets’ basis. This provision is available through the end of 2011.
• C corporations can take an enhanced deduction for contributions of certain wholesome food inventory, computer technology and equipment, or book inventory through the end of 2011. The deduction is equal to the lesser of either the basis plus half of the property’s appreciation or twice the property’s basis. The enhanced deduction for wholesome food inventory is available to other entities but cannot exceed 10 percent of the taxpayer’s aggregate net income for the year.
Charitable giving fuels much of what makes our community thrive. If that’s important to you, these tips can help you make the most of your donations and leave a lasting legacy for future generations.