By Nathan Vinson, Attorney
English, Lucas, Priest and Owsley, LLP
This is that time of year when we all start thinking about taxes – and how to pay less. We’ve often gotten the news from our accountants that perhaps our refunds won’t be as large as we’d like or that we owe. Ugh to both.
This is a good time to consider if your business can be more charitably minded, and perhaps help you pare back the tax burden next year.
Giving can reduce your tax bill
If you own a business, you have additional ways to donate to charity, thus reducing your tax burden. You are more limited on how much you can deduct verses what a person can deduct, but it’s good to know the rules so you can plan accordingly.
A recent article in Forbes highlighted some of the ways you can use your business to make additional charitable contributions to save on taxes – and of course make the world a better place.
A C Corporation, for example, can deduct up to 10% of its taxable income for donations to charity. If the Corporation exceeds the 10% threshold, the rest can be carried forward to subsequent years. So, if there is something big you want to fund this year through your company, go ahead, but just understand you may not be able to deduct it all this year.
For flow-through entities, such as S Corporations, partnerships, and LLCs, the charitable deduction flows through directly to the owners, thus benefitting them directly, and may be subject to lesser income threshold limitations.
One of the best benefits may be down the road. Giving charitably now can reduce the value of your estate, which can be helpful to your heirs. In some cases, depending on the tax laws in your state, it will help your heirs owe less.
A gift of appreciated property is especially helpful as an alternative to the property receiving a step-up in basis equal to fair market value at the owner’s death. You won’t have to pay taxes on the appreciation (albeit the gain would probably be subject to the more favorable capital gains rates) if you donate the property. Further, the fair market value of the property is used as the basis for the charitable deduction computation.
Charitable remainder trusts
An underused tool that can be extremely helpful is a charitable remainder trust. Simply put, a charitable remainder trust allows you to put a sum of money into a trust, and the trust pays the current beneficiary (e.g., you) income from the trust for the beneficiary’s life. After the beneficiary’s death, the funds left in it are distributed to the charity you selected. Most typically, the donor (i.e. you) is the lifetime income beneficiary, or in the alternative, close family members (i.e. children) are the lifetime beneficiaries.
If you own a business but don’t have a clear-cut successor, and you are ready to retire, you could put the stock from the business into a charitable remainder trust. You won’t owe taxes on the appreciated stock, and the trust can either sell the stock and invest in other income-producing assets, or it can hold the stock, pay you income in the form of stock dividends, and dispose of the stock upon your death or let the charity do so. As the Forbes article points out,“you receive an immediate, itemized income tax deduction for the present value of the remainder interest the charity has in the assets of the trust.”
When you die, the value of the business is taken out of your estate, so your heirs won’t owe taxes on that. It’s a pretty smart strategy that might work for you if you’re nearing retirement.
Giving makes people like your business
Beyond reducing your tax burden, giving to charities through your business can help those in your community think well of your business, and bring you more work and revenue. It raises your profile in the community.
You will want to choose carefully the organizations that receive your hard-earned donation. Be sure you are affiliating your company with quality charities with a strong track record. Visit them, talk to their top executives, find out who is on their board. Be sure you have a clear understanding of how your gift might be used. Ask for public recognition for your company, if you desire.
Planning your next move
The time to prepare for the 2017 tax bill – and beyond – is right now. It’s important to think about how you want things to go next year, and five, 10 and 15 years down the road. A qualified and experienced tax attorney can help you make your plans. Contact me, attorney Nathan Vinson, at firstname.lastname@example.org or (270) 781-6500 if I can assist you with tax planning.