Guest Authors Mark Neithercut and Jennifer Miller Oertel: Tax benefits of charitable giving
Regardless of whether you regularly contribute to charity, it is useful to be aware of the unique charitable giving tax benefits available to entrepreneurs. We suspect that even the most knowledgeable, charitably-minded individual may not be aware of all of these opportunities.
Gifts of Cash or Securities
Gifts of cash or securities, such as stock, to qualified U.S. charities will typically result in a charitable deduction and reduce your income tax obligation. If you are in the 33 percent tax bracket, a gift of $1,000 will result in a $333 deduction. Thus, the out-of-pocket cost of this gift would be only $666.
Gifts of Business Property or Durable Goods
Gifts of land, buildings, clothing, furniture and other durable goods can also be deducted if given to a qualified public charity and used for charitable purposes. Business owners may well have equipment or other durable goods, which if given to a qualified public charity, would result in a tax deduction. Note that the IRS recently imposed more strict rules on the gifts of automobiles, only permitting a donor to deduct the vehicle’s actual sales price, not the “blue book” value.
Contributing Appreciated Capital Assets in Conjunction with the Sale of a Business
Gifts of appreciated capital assets to a public charity will typically earn your business not only a tax deduction, but will also allow you to avoid capital gains tax. For example, if a business owner sold 10 percent of his or her business for cash and gave the resulting cash to charity, the owner would pay capital gains tax on the business sale and then get a deduction for the gift. This business owner may or may not be able to fully utilize the charitable deduction to offset the capital gain (due to various deduction limitations that may be applicable).
On the other hand, if the business owner gave away 10 percent of his or her business to charity, the owner would avoid the capital gains tax on that portion and still earn the same tax deduction. Tax planning in contemplation of a sale may result in important tax savings.
Moreover, business owners may create and utilize their own private foundation to pass on the ownership of a company to the next generation. By gifting some of the company’s equity to a family foundation, the family can keep control of the family business while reducing the income tax burden on the next generation, employing members of the next generation through the foundation and encouraging next generation philanthropy. It is important to keep in mind, however, the many restrictions on private foundations, including those relating to excess business holdings.
Split-income vehicles such as charitable remainder trusts and charitable lead trusts can be very effective tax planning tools to reduce estate taxes, as well as the income tax that your children might have to pay on their inheritance. To simplify the explanation, a donor makes a gift to a trust, which then benefits both charity and the intended beneficiaries during the trust’s term. Because the trust benefits charity in part, there are very attractive tax-planning benefits to these split-interest charitable vehicles.
Donor Advised Funds
Donor advised funds (DAFs) offer a number of attractive benefits. DAFs are offered by many public charities, including your local community foundation, banks, the Jewish federations and national nonprofits such as the National Philanthropic Trust. To create a DAF, you establish a fund at one of these charities and seed it with a gift, usually at least $5,000.
Later, you have the opportunity to offer a gift from the fund you established to any qualifying public charity, subject to the oversight of the institution that houses your fund. In practice, these recommendations are honored except in cases where you or one of your close family members would unfairly benefit from the gift, or if the intended organization is not a legitimate charity.
What are the benefits? A DAF will allow you to time your charitable gift. You can make a gift into your DAF and receive a charitable deduction at that time, while delaying the distribution of the gifts to the charities until a later time. Further, your fund is invested and therefore grows based on its investment returns on a tax-free basis. The power of compound interest is even stronger when it is tax-free! The charity managing your DAF will charge a minimal annual fee for administration and investment activities.
Donors should be aware that not all “nonprofits” are qualified U.S. public charities, and gifts to individuals are not deductible, even for situations that are obviously charitable, such as when a neighbor’s house burns down. You may not take a deduction for a gift of $250 or above or property unless the charity gives you a written acknowledgement of your gift. Tax deductions for gifts to public charities are limited to 50 percent of your adjusted gross income (30 percent for gifts of appreciated assets), and that limitation is 30 percent for contributions to private foundations (20 percent for gifts of appreciated assets). Non-pass through entities, such as C corporations, are limited to deducting 10 percent of their net income.
While it is not possible in a brief article to cover every nuance and detail of the many opportunities to be charitable while maximizing tax benefits, the authors hope that this inspires readers to be proactive in their philanthropy. We urge you to consult your qualified professional advisors, including your legal, financial and philanthropy advisors before making any decisions regarding these issues.
Mark Neithercut has more than 25 years of experience helping successful families become successful philanthropists. As founder and president of Neithercut Philanthropy Advisors, Mark and his team of professionals work with families and foundations to develop charitable strategies, manage transitions and improve performance.
Jennifer Miller Oertel is a shareholder with the law firm Jaffe Raitt Heuer & Weiss, PC, a full-service business law firm that works extensively with entrepreneurs throughout the life cycle of their businesses. Jennifer has nearly 17 years of experience in corporate law and finance, co-chairs the Nonprofit Corporations Committee of the State Bar of Michigan and is vice-chair of Social Enterprise Alliance