Charitable Donations of Money or Goods

Americans have used charitable donations to lower their taxable income since World War I when the federal government introduced the charitable tax deduction.

Not all nonprofit organizations qualify as beneficiaries for tax-lowering gifts, nor do all gifts to eligible charities qualify. Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction offers.

Charitable Donations of money or goods:

Businesses in general are not allowed to deduct charitable contributions; however, payments to a charitable organization may be deducted as an expense to the business.

For example: If the business received ad space or marketing for the payment, it may be deducted as an advertising business expense.   Another example: The business paid $20 to a church for an ad in a program for a concert it is sponsoring. The payment is not a charitable contribution but rather a business advertising expense.  A third example:  The business made a $100,000 donation to a committee organized by the Chamber of Commerce to bring a convention to your city, intended to increase business activity.  The payment is not a charitable contribution but rather a business expense.

If an S-corp makes a charitable contribution, the contribution is not deductible on the S-corp tax return but is instead taken as a deduction by the corporation’s shareholder(s).

For example, you are the sole shareholder of his S-corporation. The corporation’s gross income was $100,000 with deductible expenses totaling $60,000. The corporation also mad $1,000 contribution to a 501(c)(3) charity during the year. That $1,000 contribution is not included in the $60,000 of expenses. Instead, it’s shown on the K-1 you receive from the corporation.  On your personal return, you will claim $40,000 of pass-through income from the corporation ($100,000 income minus $60,000 of expenses). The $1,000 of charitable contributions will be taken as an itemized deduction on your personal return if you itemize.

Why is it like this?

Charitable contributions in an S-corp don’t reduce a shareholder’s AGI; instead the contributions are taken as an itemized deduction. If the shareholder takes the standard deduction instead of itemizing, they receive no tax benefit at all from the charitable contribution.

Posted in Deductions

Teaching Kids About Taxes

“If you are truly serious about preparing your child for the future, don’t teach him to subtract – teach him to deduct.”  Fran Lebowitz

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Teaching Kids About Taxes

“The best way to teach your kids about taxes is by eating 30 percent of their ice cream.” Actor and comedian Bill Murray

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“Leadership is the art of getting someone else to do something you want done because he wants to do it.”  Dwight D. Eisenhower

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2018 Tax Filing Season

The IRS will begin accepting tax returns on Jan. 29.  The tax deadline will be April 17 this year – so taxpayers will have two additional days to file beyond April 15.

Posted in IRS

Tax Preparers

When it comes to deciding who should prepare your taxes, the different designations can sometimes be confusing.  The major 3 options are Enrolled Agent, Tax Attorney and CPA.

  •  An Enrolled Agent is usually a full-time tax advisor and tax preparer licensed to practice before the IRS. They earn the designation by either passing an IRS exam or having at least five years’ experience working for the IRS.
  • Tax attorneys are lawyers who various types of tax related work. Look for a tax attorney with either a special tax law degree or certification as a tax law specialist from a state bar association.  If a great deal of money is at stake, the IRS is accusing you of committing fraud, or you’re headed to court, call a tax attorney.
  • CPA’s are licensed and regulated in all states.  They do sophisticated accounting and internal audit work, and prepare tax return.  To become a CPA, an accountant must have a college degree, experience with a CPA firm, and must pass a rigorous examination.  Some CPAs have a great deal of IRS experience, but some don’t ever deal with the IRS.
Posted in IRS

2018 Standard Mileage Rates

The standard mileage rates for business use of a vehicle will increase slightly in 2018.

For business use of a car, van, pickup truck, or panel truck, the rate for 2018 will be 54.5 cents per mile, up from 53.5 cents per mile in 2017. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

The rate for medical or moving purposes is 18 cents per mile, which is one cent higher than for 2017.

The rate for service to a charitable organization is unchanged at 14 cents per mile.

The portion of the business standard mileage rate that is treated as depreciation will be 25 cents per mile for 2018, unchanged from 2017.

Posted in Deductions

Colorado’s New Minimum Wage

On January 1, 2018, the Colorado minimum wage will increase to $10.20 per hour. For tipped employees, the minimum wage will be $7.18.

The new minimum wage is the result of the passage of Amendment 70 by Colorado voters in the November 2016 election. Amendment 70 requires the minimum wage to increase by 90 cents each January 1st until the rate reaches $12.00 on January 1, 2020.

Posted in Colorado

Donating Art

How much of a deduction can I take for the art I donated?  It depends.

The people who buy the art are entitled to deduct the fair market value of the art, but the people who create the art are only entitled to deduct the costs of the materials that went into the work.  However, artists (and writers and photographers) deduct the cost of all their supplies in the year they incur them. Thus the net effect of this is that the contribution that can be deducted by an artist for the gift of a work of art is actually zero.

Artists used to be able to deduct the value of their art that they donate, but the IRS doesn’t allow it anymore.  Around the time of Richard Nixon, Congress changed the rules so that people who created the work could only take the cost of materials (which can be fairly meaningless). There have been bills in Congress to change this rule back but as of now they have not been passed.

As an example, a person who pays $1,000 for a work of art that becomes worth $500,000 can possibly then take $500,000 worth of deductions if they give it to an art museum who will accept it. If the artist who created this work were to contribute it, she or he would get no deduction.

Posted in Deductions

Prepaid Expenses 12-Month Rule

Most individuals and many small businesses use the cash basis method of accounting. With this method you record income when money is received and you record expenses when money is paid out. Tax deductions are taken in the year they’re paid for.

The general rule is that you can’t prepay business expenses for a future year and deduct them from the current year’s taxes. This means that generally an expense you pay in advance can be deducted only in the year or years to which it applies. Such an expense must be prorated over time rather than deducted in full in the tax year in which it is paid.

However, there’s an important exception called the 12-month rule. It lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than the earlier of:

  • 12 months after the right or benefit begins, or
  • the end of the tax year after the tax year in which payment is made

An example the IRS provides in Publication 538 is:

“You are a calendar year taxpayer and pay $10,000 on July 1, 2016, for a business insurance policy that is effective for only one year beginning on July 1, 2016. The 12-month rule applies. Therefore, the full $10,000 is deductible in 2016.”

Therefore, you may be able to deduct those prepaid expenses sooner than later.

Posted in Deductions