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

How artificial intelligence is changing accounting

Artificial intelligence isn't coming. It's already here.

Early investments by large firms, including several of the Big Four, have paid off with advanced technology that can, among other things, slash the amount of time accountants spend on complex audits and asset estimates.

Now all firms, even small ones, should be thinking about how to adopt advanced technology like artificial intelligence (AI), whether it will be by contracting with specialized technology companies or building their own departments, said Derek Bang, CPA, CGMA, the chief strategy and innovation officer at Chicago-based Crowe Horwath, one of the largest accounting firms in the United States.

"They're going to have to have a strategy," Bang said. "You need to start putting some money aside into innovation." 

Reports of machines replacing accountants by the thousands are likely overblown, and capable accountants will be needed to oversee and utilize advanced technology, said Tom Davenport, a Babson College professor who studies business applications of AI.  

"At some point, there might be some job loss on the margins, but mostly we're giving people more sophisticated work to do than just looking through documents," Davenport said.

AI explained

AI is technology that enables computers to perform decision-based tasks previously left to humans. It shows up in multiple forms, including machine-based learning that can progressively become better at analysis and decisions the more it is used, and speech-based technology that can understand different voices and languages.

More than 80% of executives believe AI leads to a competitive advantage, and 79% believe it will increase their company's productivity, according to a recent MIT-Boston Consulting Group survey of more than 3,000 business executives.

AI is being developed by multiple accounting firms and will dramatically change the profession in coming years, said Jon Raphael, CPA, Deloitte's audit chief innovation officer. 

"We're at a real pivot point in terms of being able to wrangle and use data in ways we've never even contemplated before," he said.

That doesn't mean walking, talking robots like Star Wars' C-3PO and R2-D2 will be handling client meetings anytime soon.

Instead, AI is largely being used to digest and analyze large volumes of data at speeds well beyond what any person or team of people could do, Davenport said.

"What AI is doing is sort of a more sophisticated version of what spreadsheets do," he said. "The more analytic and decision-oriented computations, at least for the next 20 to 30 years, will still require humans."

Full speed ahead

At Deloitte, auditors can access AI tools with natural language processing capabilities to interpret thousands of contracts or deeds, Raphael said. The technology can extract key terms and compile and analyze that information to perform risk assessments or other functions.

Entire populations or datasets — a large company's leases, for example — can be assessed in a shorter period of time, whereas the samples previously examined by accountants could have taken a lot longer.

"It's creating a new view about where the profession is going," Raphael said. 

Applications of AI and machine-based learning vary from firm to firm, with huge variances in how companies develop the technology, Bang said.

"AI and machine learning is as deep a field as accounting is," he said.

That means firms can differentiate themselves and corner areas of the market by specializing in different areas.

At Crowe Horwath, Bang and his team of 20 data scientists have harnessed technology to tackle complex billing problems in the health care industry. The team was able to use machine-based learning to sift through enormous but disparate billing systems of its health care clients to flag accounts where there are time-consuming and costly complexities in claim processing and reimbursement. In those cases, the health care companies and hospitals can use the technology developed by Crowe Horwath to proactively deal with those complicated cases instead of waiting for the problems to make themselves known, a development that can save clients hundreds of man-hours.

"We're finding we can solve problems that couldn't have been solved otherwise," Bang said.

Instead of talking about hypothetical future uses, Bang prefers to show his firm's leaders what he and his team have already developed, from health care billing solutions to conducting the background research needed to apply for research and development tax credits.

At Deloitte, the excitement about AI is shared by its clients, with auditors showing how they are using AI-based applications to quickly conduct accurate assessments of vast real estate holdings or analyze thousands of contracts to compile the risks a large company faces.

"Clients want to do this in their own business," Raphael said. "We spark the thinking of where they can go."

How to prepare

To prepare for the oncoming wave of AI, Raphael suggested that interested CPAs gain database and IT skills by taking on specialized projects in their workplace, attending seminars, completing self-directed learning, or taking classes.

Having a solid basis in data management and a high comfort level with new technologies will give those practitioners an edge as AI use increases in the field.

He said that the professional skepticism auditors are trained to have is needed as well to be able to spot when the analyses are off and to deal with exceptions.

"We don't want to have people relying on a tool blindly," he said.

What's ahead

Smaller firms don't have the same resources as largest firms to develop and fine-tune their own AI products. But experts say that the technology will be more widely available in coming years, and they expect it eventually to become standard fare.

Davenport likens it to the advent of the internet. When the World Wide Web was first publicly available, only a few large companies could afford to go online or develop their own intranets. That changed, of course, and today there is scarcely a firm, or person, left unconnected to the web.

The same will happen with AI, and it may become as common as the internet is now, Bang said.

"The accountants of the future will exist, but they will know how to interact with machines," he said.

Source: https://www.journalofaccountancy.com/newsletters/2017/oct/artificial-intelligence-changing-accounting.html?utm_source=mnl:cpainsider&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