Many states offer various tax credits for donating to certain qualified charitable organizations, but it has been unclear how to treat those donations for federal tax purposes.
The IRS in August issued final regulations that try to make sure people are not double dipping, that is, getting a tax credit and a tax deduction for the same donation.
The new IRS rules clarify that, in general, a business can receive a state tax credit and also take a federal business deduction if that contribution is “for use in projects that improve conditions in the state,” and if the business “reasonably believes the program will generate a significant degree of name recognition and goodwill in the communities where it operates and thereby increase its revenue.”
Consequently, pass-through businesses that donate to a qualified charity – such as a scholarship granting organization or a rural health organization – can not only receive state tax credit but can also be eligible for a federal business deduction.
For instance, a business located in the state of Georgia may donate to the Georgia HEART Hospital Program, and in exchange individual members of, shareholders or partners of that pass-through entity can earn a state tax credit.
If a donation does not meet the conditions outlined by the IRS rules, there are some safe harbors available that essentially give businesses the benefit of the doubt in this regard. For instance, C Corporations are given a general safe harbor for this kind of donation. Pass-through companies that meet specific requirements can also receive a tax deduction provided that the tax credit they received was not an income tax credit.
If you are a member of a pass-through business and are interested in donating to a qualified charity, please contact us first so we can make sure you maximize your tax savings at both the state and federal levels.
Zachary Collins, CPA, is a Senior with our Business Tax & Advisory Group. He can be reached at firstname.lastname@example.org.