It’s common for many family business owners to be charitable. They value the opportunity to give back to their local communities and pass some of their business success to organizations that share similar philanthropic values. Such charitable efforts also can provide meaningful tax benefits to business owners; however, if not correctly navigated, they could become “tax bombs” owners could have otherwise avoided.
For example, one small business owner opted to donate to an organization not created in the United States. It was important for the business owner to share some of his wealth for the charitable cause, but since the organization was based in Brazil, it didn’t qualify for a tax deduction for the owner.
Also, consider a recent court case in which a $33 million charitable contribution deduction was lost simply because the appraisal summary that should have been attached in the taxpayer’s tax return failed to include cost basis information.
Given the complexity of tax planning and charitable giving, along with the added pressure of the IRS taking a hard line on the technicalities of charitable contribution deductions in the last few years, it’s critical for business owners to mind small details and avoid tax pitfalls that can easily occur.
Find Your “A-Team” & Start Early
It’s important to understand proper charitable giving is more than just writing a check toward the year-end. Business owners need to do their due diligence and align themselves with the right team that can not only assist with philanthropic efforts, but also provide simplified guidance on long-term tax and financial objectives. You need to work with a team with a focus within different specialties, such as wealth/business management, tax expertise, philanthropic strategies and estate planning. This can allow you to easily express charitable goals, and the team can manage any tax-related complexities that may pop up in the process. It’s of equal importance to start working with this team early in the philanthropic process—early planning is critical. As my colleague Jim Gustafson highlighted in a previous piece, certain state tax credits or incentives may require preapproval prior to any donation, or some qualified appraisals may be needed to validate a contribution.
Determine Best Course of Action
When it comes to increasing charitable efforts, it’s important to determine (with your team) what strategy will really make the most of philanthropic plans. For instance, are you content with simply cutting a check annually to a pre-vetted charity in your backyard? Or, would it make more sense from a long-term perspective to establish a charitable lead trust, which is gaining popularity now amid our low interest rate environment?
Avoid Foot Faults
In addition to being complex, tax rules for charitable contribution deductions require careful attention to details. Dotting the i’s and crossing the t’s by maintaining adequate substantiation and properly completing tax forms, among other things, is critical to achieving intended tax benefits.
From a philanthropic standpoint, it might be easy for a business owner to know what “good” he or she wants to do. But, from a tax-planning standpoint, it can get tricky early on. Don’t let any ticking time (tax) bombs derail your short- or long-term charitable plans.
As a trusted advisor, we want to help you navigate matters relevant to each generation of your family. Click here to subscribe to BKD Family Office Thoughtware.
BKD Family Office is an SEC-registered investment advisor offering wealth management services for affluent families and is a wholly owned subsidiary of BKD, LLP, a national CPA and advisory firm. A copy of BKD Family Office’s current written disclosure statement is available upon request. Accounting, tax and related solutions are provided by BKD, LLP.