Memorandum

To: Nora
From: Kenta Watanabe, CPA
Date: April 23, 2016
Re: Charitable Offerings

Facts
Nora wishes to donate $70,000 in December 2016 to the Boys and Girls Club, a
voluntary and nonprofit organization. Nora's net revenue for 2016 is estimated to be
about $500,000. For her individual tax form, her estimated gross revenue would be
around $350,000. She has made no further financial donations this year.

Issues(s)
- Should she donate from her company or personal account?
- Are there any tax benefits or restrictions?

Conclusion
- Nora could donate from her personal account, since she will be subject to a 10%
contribution cap if she used her corporate account.
- Yes, there are tax benefits of charitable donations, but there are still restrictions on
the number of deductions allowed and the form of company eligible to receive those
contributions.
- Nora will almost certainly profit from having a charitable donation from her
individual account. Nora could subtract the whole $70,000 by paying from an
individual account. On the other hand, if Nora withdraws the donation from the
company budget, and owing to the 10% cap, Nora will be entitled to withhold just
10% of her $350,000: $35,000

Analysis
“A charitable contribution is a financial contribution or gift made to or for the
benefit of a qualified charity. It is voluntary and rendered without the expectation of
receiving something of equivalent value.” (2018, Topic 506). Nora plans to donate to
the Boys and Girls Club, which is a qualifying entity, implying that Nora would profit
from tax benefits. (2018, Publication 526, Section 170(b)). “The charitable
contribution deduction ("CCD") for a contribution of money (or ordinary income or
short-term capital gain property) to a Sec.170(b)(1)(A) organization (e.g., public
charity, operating foundation, or distributing foundation) is limited to 50% of the
individual's contribution; in certain cases, the deduction is limited to 20% to 30%;
however, in this case, unless the contribution is to a Sec.170(b)(1)(A) organization,
the deduction is limited (2018 Publication 526 Sec.(b)). Nora's contribution from her
business account will be "restricted to 10% of the corporation's pretax net profits
(calculated without respect for any net operating loss or capital loss carryback to the
taxable year)". (2018, Publication 526, Section 170(b)(2)).
“The IRA Charity Rollover requires people over the age of 70 1/2 to contribute
up to $100,000 directly from their IRA to charitable organizations without the
contribution being classified as taxable revenue until it is removed. Contributions
must be rendered directly to a registered charity entity from a standard IRA or Roth
IRA (Topic No. 506, 2018). When donating, it is deemed a breach whether the
donating party accepts some kind of gift (whether a good or a service) as a token of
appreciation; in particular, the donating party is required to keep certificates for each
charity to which the donation was made, as well as the location of the charity. “The
IRA Charity Rolling Program enables people above the age of 70.5 to make
discretionary contributions to voluntary organizations from their IRA, and these
contributions are not classified as taxable profits upon exit” (Topic No. 506, 2018).

Document Investigation
According to IRC 170(a)(1), "Any charitable donation (as specified in
subsection (c)) made within the taxable year shall be authorized as a deduction."
Individuals are therefore covered by IRC 170(b)(1), which states that charitable
donations to eligible organizations "shall be permitted to the degree that the
aggregate of such contributions may not surpass 50% of the taxpayer's donation
base for the taxable year." According to IRC 170(b)(2), a corporation's aggregate
deductions "under subsection (a) for each fiscal year shall not surpass 10% of the
taxpayer's taxable profits."
Section 220.183(a-b), F.S. provides that “a deduction equal to 50% of a group
donation shall be allowed against any tax payable under this chapter for a taxable
year” and that “No business company shall collect more than $200,000 in annual tax
deductions for all permitted community donations made in any one year.”
When we are about to enter a tax case, the first move is to identify the outlets
that regulate it in order to assist us in taking the appropriate steps in accordance
with applicable laws and rulings. To calculate the number of tax-deductible
charitable donations, we can consult IRS Publication 526 – Charitable Contributions,
IRC Section 170 – Charitable, etc., contributions and gifts, as well as the 2016
Instructions for Form 1120.
Individuals can exclude charitable contributions of cash or property made to
eligible organizations under IRS Publication 526 for 2016. (IRS Publication 526).
Corporations may exempt charitable donations up to 10% of their taxable profits in
the year in which they are created (Form 1120 Instructions). If the investment
crosses the 10% cap, the surplus will be carried on for a maximum of five years. The
Boys and Girls Club is a qualified entity under IRC 170. This ensures that the whole
donation of $70,000 is tax free on the actual income tax report. If you are unsure
whether an agency is eligible, you have a few choices. In this situation, IRC
Publication 526 lists the Boys and Girls Club of America as an eligible entity.
Additionally, you can verify the organization's 501(c) 3 status by checking the IRS's
non-profit database or by requesting evidence of the organization's non-profit status
from the organization.

Applied Research
Individuals can subtract up to 50% of their adjusted gross income for
charitable contributions made to eligible organizations under IRC 170(b)(1).
According to Publication 526: Charitable Contributions (2017), your deduction is
limited to 50% of your adjusted gross income. But, depending on the type of
contribution and the organization, the 50% can drop to 30% or 20%. For an AGI of
about $350,000, the voluntary donation deductions will be $175,000 at 50%,
$105,000 at 30%, or $70,000 at 20%, based on the form of charity you apply to and
the type of property you donate.
If you make the gift to the company, C-C Bakery, the deductible is limited to
10% under IRC 170(b)(2), which equates to about $50,000 in 2016 based on whether
you contribute to an eligible charity and that no member or private shareholder
inside the organization benefits from the donation. If you exceed these thresholds,
which you may not be if you donated from a personal account but would be if you
contributed from a corporate account, you will carry forward the excess donation
balance for the next five to fifteen years, based on whether you contributed from a
personal or corporate account.
In Florida, according to Section 220.183(a-b), F.S., contributing to a
community charity entitles you to a 50% refund against the tax due for 2016. The act
stipulates that all community donations must be used only for programs specified in
220.03(1)(t) F.S. and that total cumulative tax credits for all community contributions
cannot surpass $200,000.

Scenario 1: If you make a $70,000 donation from your own bank account and your
adjusted gross income for 2016 is $350,000, your adjusted gross income since the
charitable contribution deduction is $280,000. Assume you are taking the $6,300
standard deduction and not itemizing. And this is the $4,050 personal exemption to
exclude. Since deducting the $6,300 and $4,050, we arrive at a net income of
$269,650. This places you in the 33% tax band, resulting in a tax liability of $88, 985.
Your company would incur $175,000 in tax on gross profits above $500,000. (34
percent ). This results in a net tax liability of $263,985.
Scenario 2: If the donation is made from the business bank account, your company
can exempt charitable donations up to 10% of its taxable profits. If the corporation's
net revenue is $500,000, then $50,000 of the total donation is tax deductible
(Instruction for form 1120). The net profits of the company less the allowance for
charitable donations results in taxable revenue of $450,000. This puts the company
in the $34 tax bracket, resulting in a tax liability of $153,000. If the individual
adjusted gross income is $350,000, it decreases to $339,650 following the statutory
deduction and personal exemption, and is taxed at a rate of 33%. Your individual tax
return would incur a tax bill of $112,085. When we include the tax costs on your
business and personal tax returns, our net tax burden is $265,085.
Scenario 3: There is a third alternative that I would prefer because it results in the
lowest average tax liability and allows for the deduction of the whole $70,000
charitable donation. The most advantageous tax situation in this circumstance is to
make a $50,000 donation through C-C Bakery. As previously said, the corporation's
tax liability after deducting the $50,000 is $153,000. The additional $20,000 can be
made directly from your own bank account. As a result, the individual taxable
revenue decreases by an extra $20,000 from Scenario 2, to $319,650. When levied at
33%, this results in a tax burden of $105,485. The amount of corporate and individual
tax expenses equals $258,485. This resulted in a tax bill that is several thousand
dollars smaller than the other two examples.

Findings and Recommendations

Dear Nora, I applaud your desire to contribute back to the community,
particularly now that your bakery is thriving and you have the resources to genuinely
assist an organization. As there is a 10% deduction cap if you donate from a company
account and a 50% deduction limit if you give from a personal account. As long as the
preferred charity is a qualified entity and you make a monetary contribution, you
qualify for the 50% personal account deduction. While you might carry over the
remaining $20,000 under the 10% corporate contribution cap, this will limit your
contribution to $30,000 next year. Your personal account has a $175,000 donation
threshold, which your $70,000 investment falls below, lowering your $350,000 AGI to
$280,000. You will further reduce the AGI to $245,000 for state taxes by taking
advantage of Florida's voluntary contribution tax credit. As a result of these
considerations, I will prefer making contributions from your bank account rather
than a business account, as this would limit your federal tax liability.

Sincerely,
Kenta Watanabe, CPA
 References
IRS Publication 526 – Charitable Contributions
IRC Section 170 - Charitable, etc., contributions and gifts Instructions for form 1120,
2016
IRS 2016 1040 Tax Tables
Florida § 12C-1.013 Adjusted Federal Income Defined