As an incentive for individuals and businesses to assist in Hurricane relief for the three major hurricanes that hit the United States in 2017, Congress has provided relief provisions of certain limitations which apply to charitable contributions. These relief provisions may assist you with year-end tax planning.
Individual charitable contribution relief provisions
An individual’s charitable contribution deduction for a tax year is generally subject to limits based both on the type of property contributed and the type of charity to which the contribution is made. These limits are generally 50% or 30% of the taxpayer’s contribution base (adjusted gross income (AGI) before net operating loss carrybacks) for the year. Overall, there is a 50% ceiling for all charitable gifts made during the year. The Disaster Tax Relief Act has temporarily suspended most of these limitations for “qualified contributions” paid during the period beginning on August 23, 2017 and ending on December 31, 2017. The contributions must be made in “cash or check,” to most church, governmental, certain private foundations, and other certain 501(c)(3) public charities that are providing relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. Donations to supporting organizations or donor advised funds will not qualify under these provisions.
The Act also suspended the overall limitation on itemized deductions (so called 3%/80% rule) for qualified deductions. The itemized deduction phase-out rule begins for adjusted gross income for married filing jointly and surviving spouse at $300,000 (half of this amount for married filing separately), $275,000 for head of household, and $250,000 for single taxpayers.
A “qualified contribution” is a cash donation to a qualified charity where the funds are used or will be used to provide relief efforts in the disaster areas for the three hurricanes mentioned above before the end of the year. The taxpayer must also obtain a contemporaneous written acknowledgment from the donee organization stating it will be using the funds to provide hurricane relief. The individual taxpayer will also be required to make an election on their 2017 Form 1040 to treat eligible contributions as “qualified contributions” under the Act. If you make an eligible donation and the written acknowledgment from the organization does not include the required language, you will need to go back to the organization and request a new letter if you want to claim a deduction under these rules. If you do not have the required letter, you will not be eligible to claim the deduction even if the donation was eligible.
The normal limitation rules would still apply to all other charitable contributions that are not eligible for these relief provisions.
Planning opportunity: These relief provisions will allow high income taxpayers who are charitably oriented to make large cash contributions at the end of 2017 to reduce their 2017 taxes without the normal limitations that would apply to them. The qualified donations could potentially reduce their taxable income to zero. Since these qualified donations cannot generate a loss for tax purposes, the excess donations will be allowed to be carried forward 5 years under the normal carryover rules. Therefore, the 50% of the contribution base limits will apply to these excess donations the same as any other donations.
C corporation charitable contribution relief provisions
“Qualified contributions” made by C corporations will not be subject to the 10% of taxable income limit that applies to normal charitable donations. This would allow a C corporation to decrease its taxable income to zero with qualified contributions. If there are excess contributions made, the excess amount will be carried forward under the normal carryforward provisions for C corporation contributions and they would be subject to 10% limit in the succeeding year. The contribution can be carried forward for 5 years.
The corporation would need the same written acknowledgement from the donee organization described above to claim the deduction under this relief provision. The corporation would also need to make an election on their 2017 Form 1120 to claim a deduction under these provisions.
S corporation and partnership charitable contribution relief provision
For pass-through entities, the entity must provide sufficient information to the shareholders/partners on their separate K-1s for them to claim a deduction under this provision if the entity makes qualified contributions. The election to claim an eligible deduction under this provision is not made at the corporate/partnership level and it is made separately by each shareholder or partner.
The pass-through entity would need the same written acknowledgement from the donee organization described above to claim a deduction under this relief provision. There currently is no guidance if the entity will need to provide a copy of this written acknowledgement to the individual shareholders/partners or not at the time of publication.
Please contact Chris Ebert at firstname.lastname@example.org or 206-382-7789 if you have any questions or would like to discuss these tax provision changes.