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Maximize Charitable Donations

Choosing a reputable, non-profit organization helps guarantee the gift will be used wisely.

Once contractors reach a certain level of success, they often consider contributing to charitable organizations. Owners may wish to give back to their communities, support a cause they feel strongly about or improve their company’s image.

Whatever the motivation, it’s important to select both the charity and the donation with care. Choosing a reputable, non-profit organization helps guarantee the gift will be used wisely. Planning the type of donation and how it’s made will help your company maximize its tax advantages, improve its bottom line and allow for future donations.

The Basics of Charitable Giving
The idea of people giving to help others has existed throughout history. In centuries past, charitable giving was channeled largely toward houses of worship, which distributed the funds as they saw fit.

Most of the charitable agencies and foundations in operation today were developed over the last 100 years. Now, with more than 1.8 million non-profit organizations operating in the U.S. alone, donation opportunities abound.

Checking Out the Worthy Cause
With this increase in available options for charitable giving comes an increased responsibility on the part of construction company owners and/or their CFMs.

Unfortunately, many “phony” charities exist today. Some may have achieved taxexempt status with the IRS, but their use of funds is far from philanthropic. Others may serve a true need, but have not met all government requirements to achieve taxexempt status.

Therefore, all donors should study potential charities carefully. A good place to begin is Publication 78: Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986 (http://apps2.irs.gov/app2/pub78).

Another useful resource is the American Institute of Philanthropy (AIP). The AIP puts out an in-depth Charity Rating Guide on more than 500 large-budget national charities every three years ( www.charitywatch.org).

The IRS has redesigned Form 990, Return of Organization Exempt from Income Tax, for the 2008 tax year (for filing in 2009 and moving forward). Donors can request a copy of a charity’s most recent 990, either from the charity itself or at www.guidestar.org.

The 990 provides detailed financial and operational information; it also indicates a charity’s willingness to be forthcoming about what it does and how it does it.

Applicable Code
Most charitable organizations that solicit donations fall under IRC §501(c)(3). Contributions made to the following types of groups under §501(c)(3) are deductible for federal income tax purposes: “religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition…or for the prevention of cruelty to children or animals…”

Reporting Requirements
Beyond researching the credibility of potential charities, it’s important to comply with all of the IRS’ reporting requirements. These vary depending on the recipient, and the type and value of the donation.

A donor must obtain and keep a bank record or written communication from the recipient as proof of a cash gift in any amount. For any deduction claim of $250 or more made in a single contribution, the donor must receive a written acknowledgment from the donee (the recipient) when the donation is made. A canceled check is normally not sufficient.

Limitations on Donations
Because each charity has different needs, there is not one “best” type of donation. However, cash or cash equivalent (such as a check or credit card donation) is the simplest way to contribute. An appraisal is never needed, and it’s easy to write a check or sign a credit card authorization.

On the other hand, nonmonetary donations can involve unforeseen problems and costs. For example, if a company or individual is claiming a dedication of $5,000 or more on a non-cash gift, they will generally have to obtain an appraisal of the contribution from a qualified appraiser.

Giving a real estate gift often involves the cost of deed preparation, recording fees, and in some states, transfer taxes. To determine the value of non-cash contributions for tax purposes, the amount of debt owed (if any) on a piece of property, or appreciation/depreciation in value of the donated real estate or stocks, must be taken into consideration.

The IRC places limits on the amount of an individual’s allowable charitable deduction based on his or her Adjusted Gross Income (AGI). And, a company’s annual donations cannot exceed 10 percent of its taxable income (without taking into account the proposed charitable donation itself).

When donations are made through a partnership, each partner takes the charitable deduction that reflects his or her interest. Generally, a partner or sole proprietor can receive a tax deduction for contributions that do not exceed 50 percent of his or her AGI. Depending on the type of property being gifted (cash vs. stock) and the type of entity receiving the gift, restrictions of 20-30 percent may apply.

Charitable Trusts
Contractors can create various types of charitable trusts, but they must use their personal assets—not company profits. Charitable trusts can help ensure that a contractor’s income (earned through the company) will continue to support worthy causes and not be lost to taxes.

The Charitable Lead Trust
The Charitable Lead Trust (CLT) can either be implemented while the donor is alive (to reduce income taxes) or be made a part of an estate planning document (to reduce estate taxes). In the case of the latter, it takes effect upon the donor’s death for the number of years specified in the trust.

For example, let’s say a construction company owner creates a $10 million CLT as part of his estate plan. For each year after his death, a predetermined amount is given to one or more charities. At the end of the term, whatever is left in the trust goes to the beneficiaries named under the trust.

So, without a trust, the $10 million in personal assets would be subject to a 45 percent estate tax rate (roughly $4 million in taxes at death). Creating a trust with a long enough term and high enough annual payout can zero out estate taxes – and still leave considerable assets to the donor’s beneficiaries.

The Charitable Remainder Trust
A Charitable Remainder Trust (CRT) is almost the reverse of the CLT. In a CRT, the charity receives whatever is left in the trust at the end of the donor’s life (if the trust is in effect while the donor is alive) or at the end of the term specified after death.

Interest is received annually if the trust is used during the donor’s lifetime. So, with $1 million in trust and an eight percent interest rate, that’s about $80,000 a year until death; then, whatever is left in the trust goes to charity.

The CRT Unitrust
The charitable trust is an important tax-planning tool. For instance, a CRT unitrust works especially well for someone with highly appreciated assets. Let’s say a construction company owner bought a large piece of land, and over time its value increased dramatically to more than $3 million.

To sell the property would mean a huge capital gain; instead, the owner can put the real estate holding into a CRT, and then sell what’s in the trust to diversify its assets. At this point, all of the assets are a part of the trust, so no income tax is paid. (In fact, the owner qualifies for an income tax deduction simply by opening the trust.) Income tax is only paid on whatever money is annually drawn from the trust during the owner’s lifetime.

Author’s Note: This section on charitable trusts is just a basic introduction to a highly complex tax specialty. An in-depth discussion of charitable trusts is beyond the scope of this article. For additional information, consult your company’s tax advisor.

Private Foundations
A private foundation is like a clearinghouse for charitable donations. Money comes in as investments and endowments, and goes out to various charities as grants.

Charitable gifts provided through corporate foundations equals about $11 billion annually in the U.S. According to the Council on Foundations, the more than 2,000 corporate foundations nationwide represent only five percent of all private charitable contributions. (A corporate foundation is a private foundation with funds contributed mainly by a for-profit business.)

Most private donations come from individuals, followed by independent and community foundations. Many civic-minded persons contribute to charities through trusts or private foundations established with the assets they have acquired through their businesses.

A sole proprietor or a partner of a successful construction company can (with such personal means as cash, real estate or securities) start a private foundation whose trustees or board of directors make annual distributions to charity.

Federal law requires a minimum annual distribution of five percent of the foundation’s net investment assets. However, when properly invested, a foundation portfolio can grow by about eight percent each year, thereby maintaining or increasing its value over time.

Also, if more than $1 million is contributed to a private foundation during any one year, the contributor receives a 30-40 percent tax deduction, depending on the type of gift (cash or stocks).

People generally create a private foundation for two reasons: 1) they are charitably inclined, or 2) they want friends or relatives to sit on a board of directors to determine which non-profits to support. According to USA Today, it’s becoming increasing popular for Americans to create private foundations that operate while they are alive.

Today, there are approximately 60,000 independent foundations (a more than 75 percent increase from 10 years ago). For a contractor, creating a private foundation can foster a positive family experience, as well as improve the company’s image.

Donor-Advised Funds
If a company needs to make a large charitable deduction at the end of the year (but does not have a specific charity in mind) or wants a simple way to donate to many charities over time, it can give to a donor-advised fund.

These funds are established within, and administered by, either an umbrella organization (such as a community foundation) or an investment company (which could require an initial contribution of $100,000 or more).

Creating a donor-advised fund is like creating a private foundation. There are solid tax advantages and the opportunity to recommend grants, although the fund administrators have the final say on where the money goes. There is very little hassle involved, and a company will receive a tax break—as well as positive recognition for its philanthropy.

A Profitable Proposition
When a company is considering making a charitable donation, business sense should still prevail. By taking advantage of the available tax benefits associated with giving to a worthy cause, a company can improve its bottom line, increase company morale and strengthen community relations. Even companies or individuals donating for completely altruistic reasons should also maximize their tax benefits so they can donate again in the future.