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Monday, May 6, 2024
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Case Studies |
Decide Now, Deduct Now But Give Later
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Case:
Carol Garcia is CEO, President and Founder of Widgets, Inc. After many years of blood, sweat and tears, Widgets, Inc. has become a very strong and established corporation. As a result, Carol has slowly cut back her long hours at the office and has been spending more time with her family and personal endeavors. One such endeavor is her philanthropic goals.
Carol is actively involved with many local charities. She has made major contributions to at least six local charities in the past three years. Not surprisingly, she has more tax deductions than she can handle (i.e., she has reached her AGI limits and has numerous carry-forwards).
So even if Carol decided to make a 'nondeductible' gift this year, she has not even begun to consider what charity she should benefit. Given the short amount of time left in the year and her excess charitable deductions, Carol regretfully decided not to make a gift this year.
Question:
Taking into account the time constraints and Carol's AGI limitations, how could Carol make a gift in 2009, yet receive a tax benefit for doing so in 2008?
Solution:
Carol should consider having Widgets, Inc. make a charitable contribution this year. If Widgets, Inc. makes a gift, it would be able to take the charitable deduction since it does not have Carol's excess charitable deduction problem. Unlike individuals, the charitable deduction rules are somewhat different for corporations. A "C" Corporation is taxable on its income and is permitted to take charitable deductions up to 10% of taxable income. Similar to individuals, however, gifts in excess of that limit are carried forward and deducted over the next five years.
Because Widgets, Inc. 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, Carol would need to have the board meet, decide and vote in 2008, but the payment could be made in 2009 (two and one-half month rule) without affecting the deductibility of the contribution in 2008.
To maintain flexibility, she suggests that Widget, Inc.'s contribution benefit the local community foundation. As a result, the gift will benefit numerous charities in the local area. Carol loves the idea. Her corporation could support charity and receive a tax benefit, two benefits that please both her business and philanthropist side.
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