Are EOY Charitable donations from S Corp tax deductible?

Question

Hello BP Community,

I recently set up an S Corp for my RE business (Colorado RE Broker) at my CPA's direction. He's been out of office for the past few weeks and I want know if there's anything else I need to do before year end to reduce my tax liability since I made quite a bit more than in previous years. I'd really like to give to a local 501(c)3 non profit rather than the IRS.

Any tax pros in CO that specialize in this and want a new client? One of my goals for 2021 is to create a tax planning strategy for myself and business.

Hope you're all having a happy and safe holiday season!

Eamonn McElroy · Answer

No.  Charitable contributions made by a sole prop / SMLLC are appropriately reported on Schedule A along with contributions made in the name of the individual.  Charitable contributions made by a partnership or S Corp also appropriately flow to Sch A of an individual owner.

Charitable contributions are NOT Sec 162 trade or business expenses.  There is no basis for deducting them on Sch C.  And doing so means the taxpayer is underpaying SE tax, potentially underpaying income tax, and opening themselves up to penalties for a frivolous tax position.

Eamonn McElroy · Answer

A charitable contribution isn't a business deduction but rather will be separately stated on your K-1 and flow through to Schedule A on your 1040.

You should examine whether or not you'll receive a tax benefit for the charitable contribution.  If you're not already itemizing, you may not get the full benefit tax of the contribution.

If you are already itemizing, and make large cash contributions to charity annually, your CPA should have spoken to you about a donor advised fund, which you may fund with cash -- or better -- appreciated publicly traded securities.

And self-employed retirement accounts.  Probably a Solo 401(k) but a SEP IRA may make more sense in select fact patterns.  All of this is pretty standard year-end planning stuff.

If you have an S Corp, you generally should be doing year-end planning.  You may want to find a CPA that doesn't take off the month of December.

Steven Hamilton II · Answer

Eammon is correct. Personal labor also isn't deductible; however, the cost of you paying for labor to included as a sponsor of an event can be considered an advertising expense. Alternatively when a company is advertising that they donate $1/item purchased etc, that is a marketing expense and not a charitable deduction.

Your example does not include enough information. They often will do things at cost or occasionally actually lose on a project for the recognition. A donation of materials nd supplies would actually be an itemized deduction even from an S corp it would pass through as a separately stated item.

Eamonn McElroy · Answer

Do you have any recommendation for a specific donor advised fund?

For my clients, yes.  : )  For everyone else, I'll say that most of the brokerage houses offer a DAF through a subsidiary or related party.  I'll leave it to you to do your due diligence and pick what's right for you, as I don't know your facts and circumstances.

And what have you seen as far as fee structure verse ROI inside of the fund. Is it worth it? Is there a certain amount of money or certain amount of time required to be held inside the fund before contributing to the charity before it makes sense?

Some of these questions are fact pattern specific and should therefore be discussed during a planning meeting with your CPA and financial advisor.  A 0.6% annual administrative fee is pretty par for the course for a DAF.

You can contribute non-publicly traded syndication interests to a DAF, however it's possible that not all DAFs will be able to accept or assist with that transaction.  Additionally, (1) in an arms-length partnership, some of the partners may not agree with the donation and (2) you may be creating more administrative overhead by engaging in this transaction.  This is something you should discuss with your advisors to be sure the juice is worth the squeeze and also that you're doing it for all the right reasons.

e.g. It might make a lot of sense for a 70 year old to donate a piece of their business as part of their overall estate and giving plan before they sell the business and retire and ride off into the sunset.  It might NOT make a lot of sense for a younger individual to donate part of their business just for an income tax deduction.

Greg O'Brien · Answer

@Jake Sklanka you are thinking about it correctly! If you CPA is only tax planning in December (or taking the month off), they probably arent a good fit. You want a CPA that is as focused on tax mitigation in the beginning of the year as they are in late December. It is a year round process, not a few magic pills on 12/31

Todd Goedeke · Answer

@Jake Sklanka check out CPAs with knowledge of Solo 401ks and charitable donations made by corporations. Thousands of RE investors hold Individual pieces of RE in their Solo 401ks and IRAs without owning syndicated RE partnerships.

Many corporations make charitable contributions in cash, goods or services on their Corporatetax return not a K-1. Contact a CPA that has experience with this planning strategy.

David M. · Answer

@Jake Sklanka

Consult a professional..  As I recall, self employed 401k's must be setup BEFORE the end of your tax year so that you can contribute in the beginning of the following year.  Its the IRA variant that allows setting afterwards to my recollection.

Eamonn McElroy · Answer

Through a self directed plan, yes, but there are landmines that one needs to be cognizant of.  You'd generally be a fiduciary as it relates to the plan and would need to be very careful about how you interact with the plan and what you invest in.  It's not that hard to wander into a prohibited transaction and blow up the account.

I'm of the opinion that it's generally more beneficial from a tax perspective to hold real estate outside of retirement accounts when we consider the long-term lifecycle and potential tax mitigation strategies.  Particularly in the wake of the SECURE Act.

If you want to invest in real estate inside of a self-directed retirement account, a syndication in which the retirement account is an LP might be safest and make a lot of sense.  But you need to compare that investment return to other asset classes, and possibly factor in UBIT and related professional fees if an income tax return is required.

Todd Goedeke · Answer

@Eamonn McElroy Many businesses operate as sole proprietors and file on schedule C. Many businesses also make charitable donations in form of services,materials and labor receiving documentation from the charity for tax reporting purposes. This is not a violation of IRS code.

Example: many construction companies donate some labor or materials or equipment use when participating in a school construction project.

Todd Goedeke · Answer

@Basit Siddiqi isn t the handling of charitable donations handled on a schedule C for a business. Itemizing on personal return has nothing to do with filing a Donation on a business schedule C form?

Are EOY Charitable donations from S Corp tax deductible?

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