In answering our question, we need to know who the intended recipient is and how much the company is proposing to contribute. Both are vital to determine whether a company can receive a charitable contribution deduction of a gift and, if so, how much of a deduction will be allowed, if any.
Qualified Charitable Organizations
Generally speaking, a corporation may receive a charitable deduction for donating cash or property to a qualified charitable organization. Public charities designated as federally tax exempt organizations under Section 501(c)(3) of the Internal Revenue Code should all qualify. However, deductions are not allowed for gifts to certain other kinds of nonprofit organizations, even if those organizations are exempt from federal income tax. In addition, you may not receive a charitable deduction for contributions to foreign governments, foreign charities, and certain private foundations. Therefore, before making a contribution with an eye toward receiving a charitable deduction, it is important to do a little homework on the organization.
Basic Due Diligence
If an organization purports to be a 501(c)(3) nonprofit, ask to see their letter of determination from the IRS and their most recent IRS Form 990 filings. A valid letter of determination from the IRS and up-to-date tax filings will help satisfy your due diligence requirements — lack of these documents should a red flag to you that selecting another charity may be prudent.
- Any cash plus the fair market value of property given to a recognized charity by a corporation is generally deductible. Such deductions are subject to a 10% of taxable income limitation;
- A corporation that accrues a contribution authorized by the Board of Directors at the end of the year may deduct the contribution if it is paid by the due date of the return 2 1/2 months later;
- Any amount not deducted in the current year may be carried forward a maximum of 5 years. In the carryover year, the deduction is once again subject to the 10% limitation (along with any current-year contributions);
- Carryovers are utilized only after deducting any current-year contributions. If carryovers from several years are present, the oldest carryovers are used first;
- A charitable carryover may not be deducted if it increases a Net Operating Loss (“NOL”) carryover.
In closing, make sure your company has a policy in place regarding its charitable contributions and that basic due diligence takes place before a check is written; everyone will be much happier and there won’t be any surprises at tax time.