 Hello and welcome to the session in which we will discuss charitable contribution, but this time for C corporation. Why do I say this time? Because we do have a charitable contribution for individual as well. There are different rules for C corporation and for individuals. Regardless, the overall idea is the same. And what's the big idea? The US government, Congress wants you, they want you to contribute money, asset, property to charities. Why? Because by doing so you are serving the public goods and the government job is to serve the public good. Therefore, you are in a sense helping the government do what they're supposed to do. So what do they do to encourage you to do so? They give you a tax deduction for the amount of money or the amount of asset you contribute to a qualified charity. Now what can you contribute? Well, you can contribute cash, you can contribute property and you can contribute ordinary income property. We're going to have to explain the concept for each type of asset you can contribute. And there are always exceptions, limitations, specific rules, whether you contribute cash, property or ordinary income property. And this is what we will discuss in this session. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. Starting with cash contribution. Simply put, you contribute cash to a charity. Great, you can deduct this cash in the year it was paid. Again, we are dealing here with C Corporation. What happened if you are an accrual basis corporation? Well, if you are an accrual basis corporation, you can make a deduction based on a promise to contribute the cash. However, you have to meet certain conditions. Just to be clarified, when we're talking about corporation, we're not talking about partnership, we're not talking about S Corporation. So you can take that deduction in the year you make the promise as long as the board of directors made a final authorization. It means the corporation itself made a commitment, an official commitment that they're going to make the contribution. That's one, it's not only that, they cannot make the contribution in the way two, three years to make the payment. The payment is made at the latest by the corporate tax return due date, which is if we're looking at a calendar year taxpayer April 15th. So if you are in 2024 and you made that decision to contribute $15,000 to XYZ charity, well, that's fine. You can make the decision and you have up until April 15th, assuming you're a calendar year taxpayer 2025 to make the payment as long as you make the payment by April 15th 2025, you can take the deduction for the year 2024. So those are the rules for cash contribution. How about if you contributed a property? Well, we're talking here specifically long term capital gains property like stocks or any property that you held less than a year. And that property is long term because if you sell it, it's going to generate long term capital gains, which is again, long term capital gains are subject to preferential tax treatment. Simply put, you held this asset that you're contributing for a year or more. That's why it's long term. Well, and you have a gain because the fair market value of the asset that you are contributing is greater than the adjusted basis. This is how we have a gain. If you sell it today, the fair market value is higher than the adjusted basis you have a gain, and you held it for more than a year. Well, the deduction generally speaking under those assets is fair market value. You can deduct the fair market value. However, there are two exceptions we're going to see later where you cannot deduct the fair market value. Now, what happened if you contributed ordinary income? What is ordinary income property? Ordinary income property is any property that's not long term capital gains property. But what we are looking at here, we're looking at, yeah, for example, if you bought a piece of land or a stock and you contributed before you held it for a year or more, that's ordinary income property. But really when we say ordinary income property, we're looking at supplies or inventory. The deduction is the lesser of, so how much can you deduct the lesser of fair market value or adjusted basis? Again, there's an exception and we will discuss the exception later. But this is generally speaking the rule for ordinary income, ordinary income property. The best way to illustrate all these concepts and the exceptions is to start with examples, starting with first simple straightforward example on December 15, 2023, Apple Enterprises, a calendar year, a cruel basis partnership approves a $10,000 contribution to New York Scientific Society. It's a qualified charity. The contribution is made April 12. How much can they take? Well, I hope you know, they cannot take anything. Why? Because it's a partnership. Assuming Apple Enterprises is a corporation rather than a partnership and the authorization by the Board of Directors is made on April 15. That's fine. Then they can deduct $10,000 in 2023. However, a partnership cannot take this deduction. Let's take a look at an example when it comes to inventory. Inventory is what? Ordinary income property. Falcon Corporation holds inventory with the basis of 15,000, fair market value of 12. What does that mean? It means this asset, if they sell it today, they incur a loss, a loss of 3,000. The rating the inventory leads a deductible of 12,000. Why? Because this is ordinary income property, the lesser of fair market value or basis, the lesser is fair market value. What can you do? What can Falcon do to maximize this contribution? Here's what they should do. They should sell the asset, sell the inventory and recognize a loss of 3,000 and this loss is recognizable. That's a loss. Then take the 12,000 that they got from the proceeds and donate to the charity. As a result, they will get a tax deduction of total of 15,000, 3,000 in losses and 12,000 for the donation. Otherwise, if they donated the asset, they would only get 12,000. So this is where tax planning, knowing the rules, will make a difference in the decision that you make. Let's take a look at an example where we contributed long-term property. Well, in the current year, Farhat Corporation gifts a plot of land, a capital asset to Northampton Community College. Farhat purchased the land five years ago for 80,000 and the fair market value of the donation is 130,000. So Farhat purchased the land for 80,000. Now, if Farhat wants to sell it, they can receive 130,000. That's the fair market value. Well, how much can I contribute? Well, long-term property, generally speaking, it's the fair market value unless there are exceptions. So generally speaking, the corporation subject to, you know, percentage limitation is the fair market value. There are $50,000 appreciation, that's fine. I can contribute the fair market value, Farhat Corporation can contribute the fair market value and get a deduction for 130,000. Now, bear in mind, we're going to look at a few examples. Here's a few exceptions to be more specific for long-term property. Here's what we're assuming here. We are assuming that Northampton Community College, this is where I went to school, Northampton Community College, where I started my college career, use this land to maybe buy a new, to build a new campus, or use this land to build a dormitory for the students, or build this land for a scientific lab or a computer lab. So they use this land for the purpose of Northampton Community College. They use the land for that. That's fine. However, two exceptions exist when you contribute long-term capital gain property, where you cannot take the fair market value. In two cases, the deduction for donated capital gain is based on the property basis, not the fair market value. The first exception, if the taxpayer donated a tangible personal property and the charity uses it for unrelated purpose, so it's a personal property, a real property, and the charity used it for a purpose that's not for that charity purpose. An example, under those circumstances, the deduction is capped at the property basis, whatever that property basis is, you cannot take the fair market value. If you go back to the Community College example, let's assume I contributed something other than land, some sort of a personal property. I purchased it for 80,000, and now it has a value of 130, but the Community College cannot use it. It's not related to the Community College. Well, if that's the case, then I cannot take the 130, I can take the 80,000. We'll work another example to illustrate this point. That's the first exception. Also, the donation of capital gain property to specific private foundation. If you are contributing to specific private foundation, remember, the idea of giving you a deduction is it's for the public good. That's why the government is giving you this deduction. If it's for a private foundation, usually there's names of important people for those foundations, the deduction restricted also to the basis. If it's a private foundation, you're not really helping the public good, because the private foundation, they do public good, but for their own under their own name. So they are benefiting. Therefore, you should not get a deduction. If you believe in them, that's fine. You can give them the property, but you don't get the fair market value. Let's take a look at an example where the gifted is to a related or unrelated purpose. In the current year, Blue Corporation gifts a painting valued at 250,000 to Eastern region art gallery, a qualified charity. The painting is displayed. So guess what? We gave them the painting and they're using the painting. They're an art gallery for display. Well, Blue Corporation purchased the painting in the year 2000 for $100,000. And we're going to assume the year 2000 is a longer than year ago, right? As for the gallery uses the painting for related purpose, Blue is permitted to deduct the full $250,000. No problem whatsoever. It's used for its related purpose. Assume Blue contributed this property to the American Cancer Society. Well, really, there's no use for this painting for the American Cancer Society. We're going to make the case that they really don't have a place. I mean, they can place it in their headquarter, but that's not the case here. Okay, so we're going to be assuming they're going to sell it. Under those circumstances, the donation is limited to the $100,000 because that's a personal property for unrelated use. Therefore, they cannot take the $250,000. They can take the $100,000. So those are the two exceptions. Also, we talked about ordinary income property. There's also an exception for that. Exception for the ordinary income property exists when the property is giving to a charity focusing on the caring of the ill, needy or infant. So if you give an ordinary income property to a charity that takes care of infant, needy people, ill people, that's fine. You don't have to take the lower of the basis of fair market value. There are rules or the tangible personal research property built by the corporation is donated to a certified educational or scientific organization for the purpose of research experimentation or research training. Or if you build this asset, you mean the corporation and you're donating it for a an educational institution or scientific organization for the purpose of research, then you don't have to take the lower. The deductible amount now is the lesser of the property basis plus 50% of its appreciation. So rather than the basis, they allow you 50% of additional appreciation. That's fine. Or bear in mind not or double the property basis. You cannot exceed the property basis. So this is basically the limit. So if you take the property basis plus 50%, if it's going to be more than twice the basis, you can take twice the basis. The best way to illustrate this always with an example, Eagle Corporation, a government merchant, gifts children attire to the Red Cross for dressing unprivileged kids. Here we have an exception. The basis in the clothing that they gave is $2,500. The fair market value is $3,500. Generally speaking, if this is inventory or ordinary asset, you will take the lower, which is $2,500. But Eagle's deduction is not $2,500. They're going to be able to take $3,000. Why? It's the basis plus 50%, 50% of the appreciation. The appreciation is $1,000. Remember $2,500? The basis, the fair market value is $3,500. So those are $1,000 above the basis. Guess what? They can get 50% of the appreciation. 50% is $5,000. So the basis plus $5,000 is $3,000. They can contribute $3,000. They can deduct $3,000. Let's assume the fair value of these closing was $8,000. Well, if that's the case, if that's the case, you are limited to twice the basis. You are limited to twice the basis. Why? Because if you take now, let's go back to the original example. If we're going with $8,000, $8,000 as the fair market value minus $2,500, let's see how much is the appreciation minus $2,500. That's $5,500 of appreciation. If we take 50% of that, if we take 50% of that, that's $2,750. Now we're going to take $2,500 plus $2,750 plus $2,000. That's going to give us $5,250. Assuming we went with the basis plus 50% of the appreciation. Well, that's the general rule. However, you cannot exceed twice your basis. Twice your basis is $2,000 times two. Therefore, you are allowed only $5,000. So you are not allowed to use basis. First, you'll try. My basis plus 50% of the appreciation. As long as it's not twice the basis, I can take it. If it exceeds the basis of twice the basis, you are limited to twice the basis. Now let's talk about the limitation on charitable contribution because always, as always, Congress is generous. The US government is generous up to a point, just like with individual, they limit you. Corporations have limits on the deductions for charitable contribution. What's the general limitation? Corporation taxpayer can deduct contribution up to 10% of their taxable income, or 15% for food donation, which is we don't have to worry about this, and a given tax here. How do we compute taxable income? It's very important to compute taxable income. When we compute taxable income, we execute the charitable contribution deduction. So we cannot count that, duh, but I have to tell you this. You cannot count net operating loss carryback or capital loss carryback, which is you can't count those in your operation. You cannot count something called the dividend received deduction, which is deduction given by the government. So when you're computing taxable income, you have to factor out, you have to take out those deductions. You have to take out those deductions. So if the corporation contribution exceeds the 10% limit, let's assume you contributed and you took more than 10%, that's fine. For GAP, you can do whatever you want to. The access can be carried forward for up to five subsequent years. And always I say GAP allows you because eventually we're going to have to reconcile GAP to the IRS. I'm always planting the seed for you. Now these carried forward contribution that are unused are combined with contribution made in those years, then they are subject to 10%. So you'll add them to those contribution. However, the deductions for the current year contribution are prioritized. So when you make a deduction in future years, first you'll take the charitable contribution that you made that in that particular year. Once they are used up, you can kind of go into the old one, the unused from the prior year. So any remaining amount from the previous years is deducted also in a chronological order, the older one first. The best way to illustrate all of this is to do what work in example. During 20x3, NOAA Corporation incurred the following income and expenses. Income from operation 150, expenses from operation 120, they had the dividend received deduction included here of 20,000 and they made $7,000 in charitable contribution. This is 20x3. So let's compute how much they can contribute, how much they can deduct of the 7,000. Is it all of it? Some of it? None of it? What's going on? So let's compute our taxable income. It's 150 minus 120 plus 20. So it's income minus expenses. Then we have to add back the dividend received deduction that was included here. So simply put, as far as charitable contribution, our taxable income is 50,000. We're going to multiply this by 10%, which will give us an allowed deduction of 5,000. We deducted 7,000. So 7,000 of that amount, only 5,000 is allowed, which will give us 2,000 of unused amount. And this unused amount is carried forward to 20x4, 20x5, 20x6, 20x7, and 20x8. Let's move forward. Let's go to 20x4. NOAA Corporation reported taxable income of 55,020x4 for the purpose of calculating charitable contribution. Also NOAA contributed 4,020x4. Well, for the purpose of 20x4, NOAA can contribute a maximum amount of 5,500. How much did NOAA contribute in 20x4? Only 4,000. So the contribution of the current year is used first. So we can deduct up to 5,500. However, we're going to deduct 4,000 first. And the remaining 1,500 of the unused portion from 20x3 is utilized to deduct a total of 5,500. So because we are allowed, now we're going to start to use up what we did not, what we had unused in 20x3. So we are allowed 5,500. First is the contribution made in x4. Left is 1,500. We're going to use the unused contribution in 20x3. And now we have in 20x3 a remaining of $500. Now, charitable contribution, whether you are dealing with individual or corporation, it's very important that you understand very well. Especially on the CPA exam, they'll try to confuse you because two sets of rules, one for individual, one for corporation, you want to make sure you keep those separated. This is important for the enrolled agent exam. Of course, if you're an accounting student, what should you do now? Go to FAHAT lectures, look at additional MCQs through false resources that's going to help you understand this concept better. Invest in yourself, good luck, study hard, and stay safe.