Permanent Charitable Tax Extenders
In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.
The four permanent charitable provisions include the following:
1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.
2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.
3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.
4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.
Deduction Reduced by Ordinary Income Element
The value of a shareholder's gifted S corporation stock is based on fair market value reduced by any ordinary income component of the corporation. Fair market value is generally the price that a willing buyer would pay a willing seller. Determining this value is sometimes difficult because there is no publicly traded exchange for S corporation shares. As a result, an appraisal is often needed to accurately value these corporations. But fair market value is not the only concern because charitable deductions produced from gifts of S corporation stock must also be reduced by any ordinary income element attributable to the S corporation itself. Sec. 170(e)(1). If the shares have been held for less than a year, the entire gain will be ordinary income and thus produce a deduction limited to basis. For shares held for over a year as long-term capital gain property, the deduction will equal fair market value but will be reduced by any ordinary income component of the corporation. This component is determined by using the percentage of the amount that would be realized as ordinary income if the corporation were liquidated.
For gifts of S corporation stock, deductions over $500 require a Form 8283, deductions over $5,000 also require completion of Section B on Form 8283. Deductions equal to or greater than $10,000 require a qualified independent written appraisal to substantiate Part B. If the stock is long-term capital gain property, the donor may use the deduction up to 30% of adjusted gross income for the year gifted with a five-year carry-forward. If the deduction is limited to basis, the limitation is 50%.
Example 4.14.10 A
Sammy Star has owned Starlight Café stock for 10 years and decides to contribute $1,000,000 of that stock to Star Academy, a public charity. If Starlight Café, an S corporation, sold its inventory, 20% of the amount realized would be ordinary income. Although Sammy Star's stock is a capital asset subject to long-term capital gain treatment upon disposition, his charitable deduction will be reduced from fair market value because of the 20% ordinary income element attributable to Starlight Café. Thus, the deduction from Sammy Star's gift of S corporation stock is reduced from its fair market value of $1,000,000 by 20% for a final deduction of $800,000. In contrast, a C corporation stock gift, assuming the same facts, would produce a full, unreduced $1,000,000 charitable deduction.
Charitable Gifts by Subchapter S Corporations
Subchapter S corporations can gift corporate assets to charity and any charitable deductions produced are passed through to the S corporation shareholders. These deductions will reduce the shareholders' outside basis in their S corporation stock.
Since S corporations are "flow through" entities, the charitable deductions from gifts of corporate assets will flow through to the shareholders in proportion to their respective ownership interests or other partnership agreement arrangement. Another consequence of charitable gifts made by an S corporation is the adjustment to the shareholders' outside basis. As discussed in GiftLaw 4.14.1, Subchapter S corporations have two basis components: an inside basis in the S corporation's corporate assets and an outside basis in the shareholder's stock. The distribution of corporate assets made by the S corporation will generally reduce a shareholder's outside basis. In the case of S corporation charitable gifts of corporate assets, the shareholder's outside basis in the S corporation stock will be reduced by the amount of the proportionate corporate basis in the gifted asset. Sec. 1367(a)(2). However, the shareholder's outside basis cannot be reduced below zero.
While S corporations do not pay tax as an entity, they still must report information to the IRS. For all non-cash gifts, the S corporation must file a Form 8283 for any non-cash gifts over $500 and for any gifts valued over $5,000, the corporation must also complete Section B of Form 8283 requiring an independent qualified appraisal (even if the amount allocated to each shareholder is less than $5,000). The individual shareholders would use the deduction reported to them by the S corporation on their K-1 and claim their allocable deduction subject to the appropriate income limitation.
Example 4.14.10 B
Starlight Café, an S corporation, makes a $1,000,000 cash gift to charity, Star Academy. The gift produces a deduction of $1,000,000 that will flow through to Starlight Café's two equal shareholders. Thus, shareholder Sammy Star is entitled to claim up to half of this amount as a deduction, or $500,000. Sammy Star will only be able to claim this deduction to the extent of his outside basis in Starlight Café stock. Because Sammy Star's basis is $2,000,000, Sammy Star can use all $500,000 of the deduction on his personal income tax return this year. Additionally, Sammy Star must reduce his outside basis in Starlight Café stock by $500,000.
If Sammy Star's basis had been $300,000, he would only have been able to use $300,000 of the deduction this year and would have to carry-forward the other $200,000 to be used in the future should Sammy acquire additional outside basis.
