|
Note: This explanation is not applicable
to an “S” corporation.
While corporations are entitled to tax deductions for charitable
donations they make, the maximum deduction for any tax year
is 10% of the corporation’s taxable income. For this purpose,
however, taxable income must be specially computed without
regard to the following:
 (1)
the charitable deduction itself, of course.
(2)
the special corporate deduction for dividends received (generally
70% of the dividends received).
(3)
any net operating loss (NOL) carried back into the year from
a future tax year.
(4)
any capital loss carried back into the year from a future
tax year.
Note that in 3 and 4, above, only if the NOL or capital loss
is being carried back into the year from a future tax year
is it disregarded. An NOL or capital loss that is carried
forward into the year from an earlier year is used in determining
taxable income for purposes of the charitable donation limitation.
Example
(1): In Year 1, XYZ Corp. has $200,000 in earnings
from its operations, $20,000 of capital gain, and $10,000
in dividend income from corporations in which its interest
is below 20%. It has $40,000 in tax deductions not counting
a charitable deduction or the dividends received deduction.
It donated $25,000 to qualifying charities in Year 1. In Year
2, XYZ has a $5,000 capital loss, which is carried back into
Year 1.
|
The
Year 1 charitable deduction is limited to $19,000: 10% of taxable
income of $190,000 as determined solely for these purposes.
The $190,000 figure is arrived at by adding the earnings ($200,000),
the capital gain without reduction for the Year 2 capital loss
carryback ($20,000), and the dividend income without regard
to the dividend received deduction ($10,000). This total of
$230,000 is then reduced by deductions other than the charitable
deduction ($40,000) to obtain $190,000.
XYZ’s
“real” taxable income can then be computed as follows:
$200,000 earnings, plus $15,000 capital gains after the loss
carryback, plus $10,000 in dividends, but minus a $7,000 (70%)
dividends received deduction, the $19,000 charitable deduction,
and the $40,000 remaining deductions. This comes to $159,000.
Charitable contribution carryovers.
Any charitable donations which cannot be deducted due to the
limitation discussed above are carried forward into the following
year where they can be deducted on top of the corporation’s
deduction for contributions made in that following year, subject
to the same limitation as it applies in that year. If it can
still not be deducted in the following year, it continues
to be carried forward. However, if it is not used within five
years after the year of the donation, it expires. Note as
well that charitable donations in excess of the limitation
amount can never be carried back to an earlier year, only
forward.
If a contribution of property (as opposed to cash) is made
by the corporation, the same rules that apply to noncorporate
taxpayer contributions apply to determine the amount of the
donation. These rules are applied first and then the total
amount donated during the year is subject to the 10% limitation.
|
