|
Wednesday, May 1, 2024
 |
Case Studies |
Not All Tax-Exempt Organizations Are Treated Equally [Under the Code], Part 1 - Pet Lover Receives Charitable Deduction
|
Case:
PetCare is a private foundation (PF) whose primary purpose is the prevention of cruelty to animals. PetCare was organized in 1980 and is exempt from federal income taxes under Sec. 501(c)(3) of the Code. PetCare receives most of its financial support from its founders; however, it does do some public fundraising. Specifically, PetCare raises awareness during local social functions by setting up booths and displays. The booths and displays educate and motivate citizens to support PetCare.
During a recent social function, Betsy Higgins stopped by PetCare's display. As a longtime animal lover and pet owner, Betsy was excited about PetCare's mission and purpose. By the end of her visit with PetCare, Betsy decided to make a generous cash donation of $10,000.
Prior to the gift, Betsy discovered PetCare was not a public charity but a private foundation. She regularly gave to local public charities, yet was unfamiliar with PetCare's different tax status. As a result, she was concerned that her $10,000 cash gift would not be tax deductible.
Question:
What are the tax consequences of making a gift to a private foundation? Should Betsy make the $10,000 gift to PetCare or find an alternative public charity?
Solution:
Generally speaking, Sec. 501(c)(3) organizations are exempt from federal income taxes. Simply put, they do not pay income taxes on yearly revenue. However, for charitable income tax deduction purposes, Sec. 170 provides a roadmap for charitable contributions. Specifically, Section 170 dictates which organizations can provide donors with tax deductible gifts. In addition, Sec. 170 specifies the amount (or limit) a donor may deduct as a charitable contribution in a particular tax year.
In general, a contribution to a Sec. 501(c)(3) organization is deemed a charitable contribution. See Sec. 170(c). Once a contribution is deemed charitable for federal tax purposes, the next set of rules determines the deduction limit imposed upon the donor.
Generally, the gift limit for cash gifts to public charities is 50% of the donor's adjusted gross income (AGI). See Sec. 170(b)(1)(A). A donor may give and deduct up to 50% of his or her AGI in one year. A gift of cash may be transferred and deducted in that year. If the donor gives more than the 50% AGI limit, the excess is carried forward and may be deducted over the next five years.
However, as stated earlier, PetCare is a private foundation. Consequently, PetCare does not fall within the favorable 50% AGI limit for cash gifts. As such, cash gifts to PetCare will be subject to the 30% AGI limit used for cash gifts to private foundations. Gifts of appreciated property to private foundations are subject to a 20% AGI limitation.
Betsy is thrilled to learn that her gift to PetCare will produce a charitable income tax deduction. Betsy has an AGI of $100,000 and has made no gifts this year. As a result, the difference in AGI limits does not affect Betsy's decision to give. In other words, Betsy can fully deduct her gift under either the 50% or 30% AGI limit rules, since her $10,000 gift represents only 10% of her AGI. Accordingly, Betsy happily sends a $10,000 check to PetCare in order to support its mission of preventing cruelty to animals.
Editor's Note: For Case Studies and a detailed discussion on the timing of gifts made by check, credit card or electronic transfer, see GiftLaw Pro Chapter 1.1.2.
|
|
|
|
