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Monday, May 6, 2024
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Case Studies |
S Corporation Gifts - Strategies and Hurdles Every Advisor Should Know, Part 10 - S Corporation Falls Short At Year-End
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Case:
Tommy Ely, 58, owns and operates eight car dealerships spread throughout the city and surrounding areas. Founded in 1977, Tommy is the sole shareholder of Ely Motorsports, Inc., an S corporation. The eight car dealerships represent mainly high-end, luxury car lines. Specializing in providing unparalleled customer service before, during and after the sale, Ely Motorsports appeals to the affluent and wealthy. Not surprisingly, Ely Motorsports generates over $250 million annually in sales and consistently ranks among the nation's top five best dealerships, a record 12 years in a row.
As a long-time active member of the community, Tommy is frequently invited to charity fundraisers and events. Tommy is also one of the top ten richest people in the city, which probably does not hurt his popularity either. In fact, Tommy is constantly supporting at-risk youth programs in the local community. Tommy actually was an at-risk youth himself. Having run away from an abusive home at age fifteen, Tommy actually lived on the streets for a brief time. Fortunately, Tommy was befriended and taken in by volunteers of the local at-risk youth center at the age of sixteen. Through love, support and counseling, Tommy turned his life around and the rest is "car" history.
After attending a recent fundraising function for at-risk youth, Tommy decided to give approximately $1 million to the local at-risk youth center. As a Board of Director of Ely Motorsports, Tommy wants Ely Motorsports to make the $1 million charitable contribution. Ideally, Tommy desires the accompanying charitable tax deduction this year. However, it is December 30, and it may be difficult to complete the gift by year-end.
Question:
In the back of his mind, Tommy recalls a rule that allows corporations some flexibility regarding year-end charitable contributions, but does not remember if it applies to S corporations. Is Tommy's recollection correct? Taking into account the time constraints, can Ely Motorsports complete the gift next year, yet receive a charitable tax deduction this year?
Solution:
Tommy's recollection is partially correct. Under Sec. 170(a)(2), if a corporation uses the accrual method of accounting, then 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, Ely Motorsports would need to have the Board meet, decide the gift amount and vote by December 31. If so, then the charitable contribution could be made in the following year (two and one-half month rule) without affecting the deductibility of the contribution this year.
However, under Sec. 1363(b), an S corporation computes its taxable income in the same manner as an individual, not a corporation. Unfortunately, the Sec. 170(a)(2) election is only available to corporations. Therefore, an S corporation must follow the timing rules for individuals instead of corporations. This is true even if the S corporation uses the accrual method of accounting. See Rev. Rul. 2000-43.
In general, individuals may only deduct charitable contributions in the year the gift is complete. Consequently, Ely Motorsports must make the $1 million charitable contribution by December 31 if it wishes to enjoy a charitable tax deduction this year. This rule somewhat limits the flexibility of an S corporation in comparison to its counterpart the C corporation.
Based upon the unfavorable news, Tommy gathers the Board immediately. During the emergency session, the Board approves the charitable contribution and issues a $1 million check to the at-risk youth center. Tommy then hand delivers the check to the charity on December 31, thereby completing the gift in time. Thus, despite the lack of tax flexibility given to S corporations and Ely Motorsports, Tommy's flexibility saved the day and the gift.
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