Recommendations for charitable contributions made by businesses

When businesses donate to various charitable organizations and events, the treatment and classification of those contributions for tax purposes can be confusing. Below are recommendations for various situations:

• Donations to a nonqualified Sec. 501(c)(3) organization, which are not deductible charitable contributions, but which may be deductible as advertising or entertainment expenses;
• Charitable contributions with value received, meaning the donor received something of value in return for the donation; and
• Contributions of less than $250, which businesses should be certain to substantiate.

Donations to an entity that is not a qualified Sec. 501(c)(3) organization

Sec. 170 provides the rules under which a taxpayer is allowed a deduction for a charitable contribution. Sec. 170 notes that donations and sponsorships that are not directly contributed to a qualified Sec. 501(c)(3) organization are not deductible as charitable contributions. If a contribution is made to an organization that is not a qualified Sec. 501(c)(3) organization, consider whether the contribution can be classified as either an advertising and marketing expense or an entertainment expense depending on the specific good or service donated.

Advertising and marketing expense: Under certain conditions, a business may deduct what would appear to be a charitable contribution as an advertising and marketing expense. For the expense to be classified as an advertising expense, the business needs to substantiate that it received something in return (a direct benefit), so the cost can be classified as an "ordinary and necessary business expense." If the business just has its name and logo published, the IRS does not consider that to be a "substantial return benefit" and does not consider it to be a deductible advertising expense. Instead, it would be more beneficial for the business to follow the guidance provided under IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, of what constitutes an advertising expense, which includes (1) messages containing qualitative or comparative language, price information, or other indications of savings or value; (2) an endorsement; and (3) inducements to purchase, sell, or use the products or services. When these attributes are in place, the business would likely be able to deduct the fair market value (FMV) of its total contribution as a marketing expense.

Entertainment expense: If the expense can instead be classified as entertainment, Sec. 274(d) provides guidance on how to substantiate entertainment expenses: The business must maintain adequate records that include (1) the amount of such expense or other item; (2) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property; (3) the business purpose of the expense or other item; and (4) the business relationship to the taxpayer or persons entertained, using the facility or property, or receiving the gift.

Charitable contributions with value received

According to Regs. Sec. 1.170A-1(h), to determine the amount of the charitable contribution deduction, charitable contributions must be reduced by the FMV of goods or services received in return for the charitable contributions. The excess amount contributed over the FMV is fully deductible as a charitable contribution. The FMV of the goods or services received in return for the contribution may be included in meals and entertainment, of which the business can deduct 50%. As indicated previously, to claim the meals and entertainment deduction, a taxpayer must keep adequate records about the expense, including the amount, time and place, business purpose, and business relationship of the attendees.

Contributions not in excess of $250

Sec. 170(f)(8)(A) requires taxpayers to substantiate a contribution of $250 or more by obtaining an acknowledgment letter from the qualified Sec. 501(c)(3) charitable organization. The acknowledgment letter must contain the following information: (1) the amount of cash and a description of any property other than cash contributed; (2) a statement whether the donee organization provided any goods or services in consideration for the contribution; and (3) a description and good-faith estimate of the value of any goods or services provided in consideration for the contribution.

A donation under $250 does not require an acknowledgment letter. The IRS, however, still requires evidence of the charitable contribution to support the charitable deduction. For cash contributions under $250, Sec. 170(f)(17) provides the reporting and recordkeeping required to substantiate the contribution deduction. As indicated under this section, some ways to substantiate the deduction adequately would be to maintain a bank record (such as a canceled check, bank statement, or a credit card statement) or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.For noncash contributions under $250, Regs. Sec. 170A-13(b) provides that a taxpayer must obtain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property in detail reasonably sufficient under the circumstances. However, a taxpayer is not required to obtain a receipt if the contribution is made in circumstances where it is impractical to obtain a receipt (e.g., by depositing property at a charity's unattended drop site). In these cases, the regulations require the taxpayer to maintain reliable written records with respect to each item of donated property that includes the same information otherwise required on the receipt, the property's cost and FMV, and certain other information.Company policy can be set at a lower threshold to substantiate any amount. Companies are well-advised to adopt the Sec. 170(f)(17) and Regs. Sec. 170A-13(b) recordkeeping requirements for a charitable contribution of less than $250.

Source: https://www.thetaxadviser.com/issues/2017/oct/charitable-contributions-businesses.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=10Oct2017

Foreign trust DNI, UNI, and the throwback rules: Important tax planning strategies

For U.S.-based investors, offshore trusts were once a highly effective and traditional vehicle for tax planning and asset management. Trusts established for the benefit of U.S. persons, both foreign and domestic, could freely accumulate income and convert it to principal. Eventually, distributions could be made when the tax environment was more favorable, lowering the overall U.S. tax burden of the trust in question.

These practices were seen as abusive. Eventually, in 1954, what would later become known as the "throwback rules" were first put into place. The original rules were a limited solution to the problem because they applied to income accumulated within the last five years of any given trust. The 1954 rules have undergone many changes, growing both stricter and more lenient for domestic trusts at various times, but foreign non-grantor trusts with U.S. beneficiaries have always been highly regulated under the throwback rules. This article focuses on foreign trusts.

Throwback rules

The throwback rules hinge upon the distinction between distributable net income, or DNI, and undistributed net income, or UNI. All of the income earned by a complex foreign non-grantor trust, with some modifications, is regarded as DNI under Sec. 643. To the extent that the income is distributed to a U.S. beneficiary, it is subject to income taxation. However, under the throwback rules, yearly DNI that is not distributed within 65 days of the end of the year becomes reclassified as UNI (Sec. 663(b); Harrison et al. "The Throwback Tax," p. 22 (N.Y. State Bar Ass'n February 2015)). For later years after the accumulation of UNI, any distributions over and above the amount of DNI attributable to the foreign trust will be regarded first as distributions of UNI until any UNI in the trust is exhausted. Only then will distributions from the trust be deemed to be from principal (Secs. 665(b) and 666).

The IRS uses a multistep process to calculate the base tax on accumulation distributions from foreign trusts; this process is found on Schedule J, Accumulation Distribution for Certain Complex Trusts, of Form 1041, U.S. Income Tax Return for Estates and Trusts; Form 4970, Tax on Accumulation Distribution of Trusts; and Part III, "Distributions to a U.S. Person From a Foreign Trust During the Current Tax Year," of Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

The value of the accumulation distribution is allocated to preceding years in which the amount of DNI exceeded distributions, modified based on the taxes the trust paid that are attributable to that value, and taxed as an increase to income tax within the computation years (see IRS, Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (Jan. 12, 2017); Silverman, "Taxation of Foreign Nongrantor Trusts: Throwback Rule," 23-2 Tax News & Comment 1 (August 2014)). Additionally, an interest charge, essentially a penalty, is added to the tax on the UNI, as determined by a table indexing the applicable years of the throwback tax to a given rate to be applied to the taxable amount (Sec. 668). To make matters worse, the potential tax burden of the throwback rules may equal up to 100% of the value of the accumulation distribution itself (Sec. 668(b)).

Making principal available while avoiding the throwback rules

Mitigating the negative effects of the throwback tax is a crucial concern for any professional involved in planning and administering a foreign nongrantor trust. Where UNI has been allowed to accumulate, the question is how to access the trust principal, which represents "clean capital" for the U.S. beneficiary, without triggering an accumulation distribution. Because the UNI is deemed distributed before principal, to make principal accessible for the beneficiary, it is necessary to find some way to move the UNI out of the trust without the throwback rules applying.

A simple and effective way to do this is to move the trust income out into a foreign subtrust (Harrison, pp. 21–22). These sorts of trust-to-trust distributions, if not carefully planned, could lead to application of the throwback tax; a successful distribution at the trust level, however, avoids bringing the assets within the remit of a U.S. beneficiary while placing the entire accumulation distribution within an offshore entity and, therefore, avoiding any trigger of the throwback tax.

This subtrust should possess a few qualifications to effectively receive the carried-out UNI of the initial trust. For starters, it should afford the trustee absolute discretion to distribute to multiple beneficiaries. This provides a safeguard against vesting issues that might arise from a single-beneficiary foreign trust. There is a risk with single-beneficiary trusts that the IRS might interpret them as vesting the assets in the beneficiary who holds the sole right to gain from the trust, resulting in a deemed distribution to a U.S. beneficiary and the application of the throwback tax. Giving the trustee absolute discretion ensures that no beneficiary has the right to any portion of the trust assets, maintaining the integrity of the trust as an entity. For the trustee of a complex trust granted reasonably broad latitude to act, the creation of and distribution to a subtrust incorporating beneficiaries other than the U.S. beneficiary should be achievable without any asset allocation to the U.S. person in question.

The other consideration that should be taken into account when creating the subtrust is the beneficiaries' character. Foreign beneficiaries are preferable to U.S. beneficiaries to avoid U.S. onshoring. There is a special issue to be aware of with the use of charitable interests for this role, especially for U.S. beneficiaries without clearly identifiable foreign beneficiaries at hand: Should the subtrust be constructed so that all of the discretionary interest in the trust is held by organizations that qualify as exempt charitable organizations, the carrying out of UNI will fail. Contributions to such a trust by the original trust would be treated as a below-the-line deduction rather than a distribution, with the effect being that UNI will still be regarded as present within the trust and distributable to the beneficiary (Sec. 4947). Charitable interests must be paired with noncharitable and, ideally, non-U.S. beneficiaries to carry out the UNI.

It must be noted that distribution to a subtrust only serves to make principal accessible for the beneficiary of the initial trust; it does not eliminate the throwback tax issue. The characterization of the income as UNI will follow it into the subtrust and, with that, the compounding interest rate for applicable years of accumulation. If it is desired that the UNI eventually be distributed to the U.S. beneficiary, prior discussion and planning will be necessary to mitigate the eventual throwback tax burden.

Source: https://www.thetaxadviser.com/newsletters/2017/oct/foreign-trust-dni-uni-throwback-rules.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=06Oct2017

New Updates on Hurricane Tax Relief (10-05-2017)

Hurricane tax relief (10-05-17)

On October 2, 2017, the President signed H.R. 3823, the Disaster Relief and Airport and Airway Extension Act of 2017, which provides temporary tax relief for victims of hurricanes Harvey, Irma, and Maria. The following is a brief overview of some of the provisions of this Act.

• Casualty losses: Affected taxpayers can calculate their deduction without regard to the 10% floor. Also, taxpayers aren't required to itemize to take a casualty loss. 
• Withdrawals from IRAs and retirement plans: Taxpayers located in the disaster areas may withdraw up to $100,000 from IRAs and qualified retirement plans as qualified hurricane distributions. The 10% penalty doesn't apply, the distribution is included in income ratable over three years (by election), and withdrawals can be recontributed within three years.
• Loans from retirement plans: For qualified taxpayers, the limit on loans from qualified retirement plans is increased to $100,000 and the first loan repayment is delayed for one year.
• Charitable contributions: Contributions made between August 23, 2017, andDecember 31, 2017, for Harvey, Irma, or Maria relief efforts are not subject to the 50%, 30%, and 20% of AGI limitations under IRC §170(b). Note that hurricane contributions must be in cash. For taxpayers that do not itemize their deductions, the contributions can still be deducted in full in addition to their standard deduction.
• Credits:
  • Employers in hurricane Harvey, Irma, or Maria disaster areas will be eligible for a new employee retention credit that equals 40% of the qualified wages for each eligible employee, up to the first $6,000 of wages.
  • For taxpayers in the hurricane areas, if their earned income for 2017 is less than their earned income for 2016, they may elect to use their earned income for the 2016 tax year for purposes of calculating the Earned Income Credit and the Child Tax Credit.

California does not conform to any of the provisions of the Disaster Relief Act. However, any distributions or loans made from a qualified plan under the Act will not disqualify that plan for California purposes.

Source: Spidell