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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 11611
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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If two people are owners of a large California S Corp and

Customer Question

if two people are owners of a large California S Corp and they also own a 503 1c charity Can the S corp donate to the charity or should they be taking a distribution and making that donation themselves?Thank you
Submitted: 9 months ago.
Category: Finance
Expert:  Lane replied 9 months ago.

Hi. I can help. My name's Lane.

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First of all (just a technicality, but it might be good to know) 501(c)(3)'s aren't owned by individuals. They are owned by the public ... This is why, when a Not for Profit is dissolved, any remaining funds must be given to ANOTHER charity.

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However, you are likely on the board, or officers, which makes you what IRS will call a related party.

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So any contributions made by the S-Corp, or by you as individuals, will likely be HIGLY scrutinized. THe form (whether the S-Corp makes the contribution and it lowers the taxable income coming to you on the K-1 ... or whether you take the deduction on your 1040 and it lowers your personal taxable income) doesn't really matter.

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What DOES matter is whether IRS looks at this as income shifting (under the related party rules), creating a deduction for you by using something else over which you have control.,

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OR

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Whether this could create what's called private enurement (sometimes called an excess benefit transaction) on the non profit side, which can jeopardize the non-profit status.

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As along as the funds pass directly through in a way that doesn't benefit you personally, For example making a restricted donation that requires the money go DIRECTLY to a certain use by non-profit that's a part of the non-profit's mission, such as buying clothes for the needy, or to 100% to fund a grant to another charity that further's YOUR non-profit's cause as well, you SHOULD be fine.

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But anything there is this much overlapping control, (IF you are audited) you'll want to document well.

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There are some limits for S-Corps, that, again, mirror the limits for individuals:

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An S corporation qualifies for the same charitable deductions that apply to individuals. The corporation should make the contribution from its own accounts and keep receipts. Generally, allowable deductions cover contributions to religious organizations, governments, non-profit schools and hospitals, war veterans’ groups, and any organization able to accept tax-deductible contributions.

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(The corporation can’t deduct contributions to most foreign organizations, or to social clubs, sports leagues, lobbyists, profit-making organizations, non-student individuals and political groups.)

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The Internal Revenue Service limits the total of all charitable contributions to 50 percent of an S corporation’s adjusted gross income, with some variations in specific cases.

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Just as with individual donations, The 50-percent deduction limit applies to most charitable organizations, but certain organizations have a 30-percent limit, including veterans’ organizations, fraternal societies, live-in students and nonprofit cemeteries.

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“Capital gain property,” which is any property that would have produced a capital gain if it had been sold instead of donated, has a deduction limit of 20 percent or 30 percent, depending on the recipient.

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Again, given that you are the only owners, and you each intend to make the same amount of contributoin, the form that this takes (S-Corp vs individual) doesn't make a difference. But HOW that's handled, whether the donation could be perceived in any way as accruing back to you, because of your control of the organzation, is critical.

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I would seriously look at (1) making a restricted donation to be used in a way that can in now way be perceived as your personally benefitting, OR even (2) making the contribution to a charity who's mission aligns well with your non-profit's mission.

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This piece is still the seminal piece in looking at private enurement: https://www.irs.gov/pub/irs-tege/eotopicc90.pdf

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Please let me know if you have questions at all.

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lane

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I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Expert:  Lane replied 9 months ago.

P.S. meant to give you this as well, ... a good overvie of "restricted donations."

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https://nonprofitsassistancefund.org/resources/item/managing-restricted-funds

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Please let me know if you have any questions at all, before rating me

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

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Thank you!

Lane

I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986