Deducting Charitable Gifts Depends on a Variety of Factors

donation-box_LI-532x266 Deducting Charitable Gifts Depends on a Variety of Factors

Whether you’re planning to claim charitable deductions on your tax return or make donations this year, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.

What You Give

Among the biggest factors affecting your deduction is what you give. For example:

  • Cash or ordinary-income property. You may deduct the amount of gifts made by check, credit card, or payroll deduction. For stocks and bonds held one year or less, inventory, and property subject to depreciation recapture, you generally may deduct only the lesser of fair market value or your tax basis.
  • Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.
  • Tangible personal property. Your deduction depends on the situation. If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis. But if the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.
  • Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
  • Use of property or provision of services. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift. When providing services, you may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

Other Factors

First, you’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable deductions may be reduced if they exceed certain income-based limits.

In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.

Planning Ahead

For 2018 through 2025, the Tax Cuts and Jobs Act nearly doubles the standard deduction ― plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax.

You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year.

The Years Ahead

Your charitable giving strategy may need to change in light of tax law reform or other factors. Let us know if you have questions about how much you can deduct on your 2018 return or what’s best to do in the years ahead.

Did you repair or improve business property?

renovation-stone_LI-532x266 Did you repair or improve business property?

Repairs to tangible property, such as buildings, machinery, equipment or vehicles, can provide businesses a valuable current tax deduction — as long as the so-called repairs weren’t actually “improvements.”

The costs of incidental repairs and maintenance can be immediately expensed and deducted on the current year’s income tax return. But costs incurred to improve tangible property must be capitalized and recovered through depreciation.

Betterment, Restoration or Adaptation

Generally, a cost must be depreciated if it results in an improvement to a building structure, or any of its building systems (for example, the plumbing or electrical system), or to other tangible property. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must depreciate amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must depreciate amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must depreciate amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

Safe Harbors

A couple of IRS safe harbors can help distinguish between repairs and improvements:

1.      Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be depreciated, though. These amounts are subject to analysis under the general rules for improvements.

2.      Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

Learn More

To learn more about these safe harbors and other ways to maximize your tangible property deductions, contact us or complete this from and we’ll contact you.

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3641334295 Did you repair or improve business property?

Deducting Qualified Business Income

small-business_LI-532x266 Deducting Qualified Business Income

The TCJA created a new deduction for small business owners who operate pass-through entities. That includes domestic companies operated as sole proprietorships or through S corporations, partnerships, certain LLCs, trusts, and estates. Income from such entities may allow business owners to deduct 20% of their qualified business income (QBI).

On the surface, the deduction may seem straightforward.

Example 1: Laurie Wilson runs her website design company as a sole proprietorship. In 2019, her net income from this business is $100,000. Laurie can take a $20,000 (20% of $100,000) QBI deduction on her 2019 tax return.

However, some business owners may find taking the QBI deduction more challenging.

Learning the Limits

The QBI deduction may be subject to limitation if the taxpayer’s QBI is from a trade or business that pays W-2 wages to employees or has certain qualified property. In addition, the deduction may be limited if the trade or business is one of certain specified service trades or businesses.

Both limitations apply only to taxpayers with taxable income over certain thresholds, which are adjusted annually for inflation. For 2019, the taxable income thresholds are $321,400 for married couples filing joint returns, $160,725 for married individuals filing separately, and $160,700 for single taxpayers as well as heads of household.

Taxpayers who have taxable income above those thresholds may find their QBI deduction reduced or eliminated altogether. In those situations, it may pay to contribute to retirement plans, bringing taxable income below the relevant threshold.

Example 2: Jerry Nolan is the 100% owner of an S corporation. In 2019, Jerry and his wife Marie expect to have taxable income of $350,000. If either or both spouses can contribute a total of $30,000 to a pretax retirement plan, that will bring their taxable income below the $321,400 threshold, helping them to get a full QBI deduction.

Business owners who already have a defined contribution plan in place, for instance, could explore setting up a defined benefit plan, as well. Our office can help you weigh the advantages and disadvantages of this strategy.

From More to Lesser

Even for business owners under the taxable income thresholds, a 20% QBI deduction might not be available. That’s because the QBI deduction is the lesser of 20% of QBI or 20% of taxable income less net capital gain.

Example 3: Steve Thomas has $200,000 of QBI from his consulting firm, which he operates as a sole proprietorship. After taking various deductions (self-employment tax, retirement plan contributions, itemized deductions), Steve winds up with $140,000 of taxable income this year. He has no capital gains for the year.

In this situation, Steve’s taxable income ($140,000) is less than his QBI ($200,000), so Steve’s QBI deduction would be only $28,000: 20% of $140,000.

If Steve can raise his taxable income over $200,000, he could claim a $40,000 QBI deduction. Assume that a $60,000 Roth IRA conversion would add $60,000 to Steve’s taxable income, to just over $200,000. Then Steve’s $200,000 QBI would be the lesser number, and he could take a full $40,000 QBI deduction: 20% of $200,000.

It’s true that a Roth IRA conversion would add to Steve’s tax bill for the year, but the added QBI deduction would be an offset. Once all the numbers are crunched, this could be a relatively low-tax way to move money into a Roth IRA, from which all distributions can be untaxed, after five years and age 59½.

Earnings Don’t Count

Business owners should be aware that QBI is meant to be net business income, after all claimed business deductions have been taken. Thus, the QBI rules exclude salaries to S corporation shareholders and guaranteed payments to LLC members. Those amounts are not QBI, so they don’t merit a 20% deduction.

Some S corporation owners may be tempted to lowball salaries and, thus, increase QBI. However, the tax code requires reasonable compensation for owner-employees. A business owner’s efforts to take a reduced salary in order to increase QBI may lead to an IRS audit, recasting net business income as earnings, and perhaps generating steep penalties.

Need Help?

Do you need help with payroll or other accounting services? We can help. Contact us to speak about our services and how we can help you and your business.

Retiree’s Charitable Contributions Could Offer Income Tax Reduction


Retiree-contributions_LI-532x266 Retiree’s Charitable Contributions Could Offer Income Tax Reduction

As the filing season for 2018 tax returns reaches a peak, many people will learn that they’re no longer itemizing deductions. The TCJA placed limits on some deductions and increased the standard deduction significantly, so most taxpayers are taking the standard deduction, rather than itemizing.

One result is that charitable contributions offer no direct tax benefit for many donors. An indirect benefit may be available for people who are 70½ or older. They can take qualified charitable distributions (QCDs) from their IRAs and effectively reduce their income in a maneuver solidly supported by the tax code.

(Taxpayers under age 70½ will report taxable income if they send IRA dollars to charity, so this tactic won’t work. That said, people under the QCD age should inform their parents and other valued seniors about this give-and-take option.)

ABCs of QCDs

IRA owners can send QCDs to recognized charities, up to $100,000 per person per year. They receive no deduction for the contribution, but they also do not have to include the distribution in income. Moreover, a QCD counts toward required minimum distributions (RMDs), which IRA owners must take after age 70½.

Example 1: Ken and Linda Martin are both age 75 with IRAs. Ken has a $20,000 RMD in 2019; Linda’s RMD is $12,000. If they take only RMDs, the Martins will increase their taxable income by $32,000 this year.

Each year, the Martins donate $10,000 to their favorite charities. Even with a $10,000 charitable contribution, it will not pay for this couple to itemize deductions in this hypothetical example.

Therefore, Linda sends $10,000 to selected charities from her IRA via QCDs. Now Linda needs to take only another $2,000 from her IRA to satisfy her $12,000 RMD for the year; Ken will take his $20,000 RMD. In this scenario, the Martins report $22,000 in taxable IRA distributions this year, rather than $32,000. Effectively, they have deducted $10,000 from their income by using QCDs.

Realistic Expectations

Using QCDs may not be a straightforward exercise. IRA custodians differ in the way they handle the procedure.

Taxpayers may have to call their IRA custodian and speak to a designated person who is familiar with QCDs. Charitable recipients can be named, along with their mailing addresses. Securities might have to be sold, if the QCD is to be made in cash, and a form might have to be signed by the IRA owner for each charity, permitting the QCD.

Other financial firms might send out a distribution booklet to be returned, along with a signature guarantee for each QCD. Yet another possible method is to handle the QCD transaction online. The process can be time-consuming and possibly confusing, so it’s best not to wait until the waning days of December to get started.

Keep in mind that a distribution will only be a QCD if the entire distribution meets the requirements for a charitable contribution deduction, such as a charity’s eligibility under Section 501(c)(3) of the tax code and substantiation requirements. QCDs can’t be sent to donor-advised funds.

IRAs Eligible for QCDs 

  • Qualified charitable distributions can come from most types of IRAs, including rollover IRAs and inherited IRAs, other than “ongoing” simplified employee pension (SEP) IRAs or savings incentive match for employees (SIMPLE) IRAs.
  • For this purpose, a SEP IRA or a SIMPLE IRA is treated as ongoing if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which the charitable contributions would be made.
  • Following the IRS’ position, some IRA custodians will permit a QCD from a SEP or SIMPLE IRA for a given year if no contribution has been made to the plan that year.

Get Help

Before making any contributions, speak with us about its impact on your taxes.

Five-Point Meal Expense Test

business-dining_LI-532x266 Five-Point Meal Expense Test
Photo: Rawpixel

The Tax Cuts and Jobs Act (TCJA) of 2017 generally disallowed all deductions for business entertainment, amusement, and recreation (see the May 2018 CPA Client Bulletin). However, the TCJA did not specifically turn thumbs up or down on the deductibility of business meal expenses.

Example: Jim Morgan, who owns a roof cleaning business, takes a prospect to lunch and pays the $60 bill. Under the old law, Jim could take a $30 (50%) tax deduction.

Is this still the case? In Notice 2018-76, issued in the second half of last year, the IRS clarified that such business meals generally remain 50% tax deductible. Proposed regulations will be published in the future, but business owners can rely on Notice 2018-76 in the interim.

Essentially, this notice confirms that anything that might be considered entertainment won’t be a deductible expense. The IRS’s list includes nightclubs, theaters, country clubs, sports events, and so on. Regular business meals, on the other hand, may still qualify for the 50% deduction.

Five Points

Drilling down, the IRS listed five tests that must be passed in order to support the deduction:

  1. The expense must be an ordinary and necessary expense, paid or incurred in carrying on a trade or business.
  2. The meal can’t be considered lavish or extravagant, considering the business context.
  3. The taxpayer (or an employee) must be present.
  4. The other party must be a current or potential business customer, client, consultant, or similar business contact.
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food and beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts and must be priced reasonably.

Example: Carol Clark takes a client to a baseball game, where Carol buys hot dogs and drinks for herself and the client. The cost of the game tickets is not deductible. Carol can deduct 50% of the cost of the food and beverages as long as she can show that these outlays were separate from the ticket cost.

Note that the IRS uses the expression “food and beverages” in this notice. This may imply that the cost of taking a business contact out for coffee or alcoholic drinks may be 50% deductible, even if no meal was served.

It’s also worth noting that activities generally perceived to be entertainment may be deductible business expenses ― if you’re in an appropriate business. The IRS gives examples of a professional theater critic attending a play and a garment manufacturer conducting a fashion show for retailers.

Business expenses can get complicated. Our staff can let you know if some type of entertainment could be considered deductible advertising or public relations for your company. Give us a call.