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Sunday, May 5, 2024
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Case Studies |
A 2004 Gift Finds its Deductibility in 2003
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Case:
SmartTech, Inc. is a publicly traded C corporation, which has over 1,000 employees on three different continents. Paul Norman, 51, is President and CEO of SmartTech. Paul is not only a great innovator but also a great philanthropist. By the age of 30, Paul made his first million and, by the age of 40, he created his first private foundation. Because Paul contributes regularly to both public charities and private foundations, he has more tax deductions than he can handle (i.e., he has reached his AGI limits and has numerous carry forwards). Even if Paul decided to make a "nondeductible" gift this year, he would have to consider which of his special charities he would benefit. Given the short amount of time left in the year and his excess charitable deductions, Paul decided not to make a gift in 2003.
Question:
Taking into account the time constraints and Paul's AGI limitations, how could Paul possibly make a gift and produce a tax deductible benefit for doing so?
Solution:
Because Paul is unable to benefit tax-wise from additional gifts, Paul instead should consider having SmartTech make a charitable contribution. If SmartTech made the charitable contribution, it would be able to take the charitable deduction, since it is does not have any excess deduction problems like Paul. A C corporation is taxable on its income and is permitted to take a charitable deductions up to 10% of its taxable income. Gifts in excess of that are carried forward and deducted over the next five years.
If SmartTech, a C corporation, uses the accrual method of accounting, it may make a gift within two and one-half months after the close of the corporation's tax year, yet elect to have it deductible in the prior year. However, the Board of Directors must authorize the gift and must designate the amount of contribution prior to the end of the year. Therefore, Paul would need to have the Board meet and vote in 2003, but the payment could be made in 2004 (per the two and one-half month rule) without affecting the deductibility of the contribution.
Paul loves the idea. His company could support charity and receive a tax benefit - two benefits that please both his innovative and philanthropist sides.
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