The decision to give to charity is often made hurriedly at the end of the year for business taxpayers and investors as they combine their impulse to give with a desire to generate a tax benefit. However, it’s a decision that needs careful consideration, according to Tom Wheelwright, CPA, CEO of WealthAbility.
“Small-business owners, entrepreneurs and investors can make a difference and impact the world for good by donating to charity,” he observed. “But it’s important that they check with a CPA before doing so in order to maximise the tax-saving potential of their donations.”
Wheelwright advised CPAs to educate their clients about the impact of charitable giving, with a number of guidelines in mind. “They should know that any major contribution should be cleared first with their CPA,” he said. “The CPA can verify that a donation to a particular group or organization qualifies for a tax deduction. Many taxpayers understand that they can deduct donations to a nonprofit 501(c)(3), but they may not know that there are other organizations that also qualify.”
Does it matter what motivates business philanthropy? “No,” said Wheelwright. “It’s who you give the donation to that makes a difference — it doesn’t matter why you’re doing it.”
While not a factor in the business entity decision, there are differences between a C corporation and an S corporation in the charitable deduction realm, Wheelwright indicated.
“While a C corporation can only deduct 10 percent of its income, an owner of an S corporation that does not take the standard deduction can deduct up to 60 percent of their adjusted gross income for cash contributions,” he said. “For non-cash donations, the deduction limit is 30 percent. And corporations on the accrual method of accounting may elect to have a charitable contribution treated as paid during the taxable year, if payment is actually made on or before the 15th day of the third month following the close of the taxable year, if authorized by the board of directors,” he said.
Wheelwright sees donor-advised funds as the answer for many taxpayers, both individual and business, that want to make a contribution and get a deduction but don’t yet know where to donate: “They’re an intermediary between the donor and the eventual donee. They’re becoming more and more popular with our clients.”
A donor-advised fund is a separately identified fund or account that is maintained and operated by a 501(c)(3) organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it, but the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. The funds donated to the account are typically invested for tax-free growth, and the donor can direct the donation to any charity that qualifies under the IRS guidelines.
“It’s like having your own private foundation without having to set it up and maintain it,” said Wheelwright. “The reason they’ve become increasingly popular over the past five years is that the donor has control over where and when the funds are donated. They can make a contribution in one year to the donor advised fund and get the charitable contribution deduction, and then make the actual donation in the following year.”
