Charitable Contributions After the Tax Cuts and Jobs Act

One of the side effects of the Tax Cuts and Jobs Act has been to diminish the value of the charitable contribution deduction. Can anything be done to minimize the impact?

First an observation--- whenever tax reform comes up, there appears to be a concerted effort to reduce/eliminate the charitable contribution deduction.  The Tax Foundation calculated that in 2016 the charitable contribution deduction cost the federal government $58 billion in lost revenue.  While many politicians try to engineer taxpayer behavior through various tax incentives (see the plethora of tax credit schemes), they argue that eliminating the charitable contribution deduction would have a minimal impact on aggregate charitable giving.  This author believes that there is a desire among some to reduce the role of charitable and religious organizations in providing social welfare benefits and concentrate these functions into the hands of government, but that is another subject.

 The Tax Cuts and Jobs Act has eliminated the personal exemption for individuals while greatly increasing the standard deduction amount.  This change, when coupled with the new limitation on the itemized deduction for state and local taxes, will have the impact of significantly reducing the number of taxpayers that itemize their deductions rather than claiming the standard deduction.

When S-Corp banks calculate their taxable (ordinary) income, charitable expenditures are not deducted but instead flow to the individual shareholders as an itemized charitable deduction. The recent tax legislation has not altered this treatment.  With many shareholders now claiming the standard deduction, the charitable deduction flowing to them will have no incremental tax value.

One of the attributes of a charitable donation is that the donor does not receive a benefit.  Indeed, the IRS has issued numerous and detailed guidelines for reducing the deductibility of a charitable expenditure for the amount of benefit(s) received.  With respect to businesses, many expenditures being classified as charitable donations actually provide a real and anticipated value to the donor.  When a community bank provides support to a charitable organization, event or function in a public and published manner, they expect that goodwill will be derived from the transaction with a resulting commercial benefit.  Such expenditures might better be classified as marketing or public relations. 

Accordingly, management should exercise careful judgement in recording expenditures so as to properly classify them based on the benefit received and to maximize appropriate tax benefit.

While the benefit of charitable deductions was not changed for C-corporations in the Tax Cuts and Jobs Act, the same recording and classifying concepts apply as C-corps are limited with respect to deductible amounts for charitable contributions. 

Feel free to contact us if you would like to discuss these concepts further.