CFMA Building Profits
Giving 101
How to Maximize Your Charitable Donation.
By Andrew Scott
Introduction
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 tax-exempt 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 tax-exempt 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 acknowledgement 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
AGI. And, a company’s annual donations cannot exceed 10% 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% 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% 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% 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 8% 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 5% 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 5% of the foundation’s net investment assets. However,
when properly invested, a foundation portfolio can grow by about 8% 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% 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 nonprofits 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% 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.
A Real-Life Example
The Foundation Center reports that average pre-tax profits donated to charities by U.S. companies stood at
1.2% in 2004, rather short of the 10% allowable for tax purposes. Yet, many companies discover that the
benefits of giving far exceed the dollars saved in tax deductions alone.
For example, the R.W. Murray Co. (a GC in Manassas, VA serving the Washington-Baltimore area since 1959) has
established a unique tradition for its company giving.
Every year, each of the company’s 50 employees can designate any charity they like, and the company makes a
donation to the charity on behalf of that employee. The amount of the gift is a set dollar figure (one year
it was $100; another year, $250) multiplied by the number of years the individual has worked for the company.
In 2006, R.W. Murray Co. contributed more than $53,000 to 22 organizations. Recipient charities included:
- USO World Headquarters
- Global Fund for Women
- The Leukemia & Lymphoma Society
- Special Olympics of Virginia
- The Osbourn Park High School Drama Department
In addition, the company makes annual contributions to several educational organizations that support local
students entering the construction industry.
The bottom line: R.W. Murray Co.’s donation program generates more than just tax savings. It boosts staff
morale, which helps the company hire and retain good employees – a major contributor to the company’s success.
Andrew Scott is a Senior Implementation Advisor at ITA Implementation Services, LLC in Buffalo Grove, IL. He
implements tax-saving recommendations for closely held companies and their owners, from corporate restructuring
to individual estate planning.