TAX 650Module Seven Scenario

Describe how a business charitable contribution is treated for tax purposes if the business

owner is:

 A sole proprietor

In sole proprietorship, the business taxes are filed on Schedule C of the business owner’s

personal Form 1040. Since individuals can only deduct charitable contributions on Schedule A, a

sole proprietor cannot make separate charitable contributions. The charitable contributions here

cannot be directly deducted from the income on the personal income tax return. The sole

proprietor must therefore be able to itemize the deductions to make them. They are deducted as

part of the itemized deductions.

 A 100% corporate shareholder

In this case, the charitable contributions made under the corporation are not deductible on the

personal income tax return of the corporate shareholder. The charitable contributions the

corporate shareholder makes personally are deductible in his or her personal income tax return as

itemized deductions if it exceeds the standard deductions.

 A partner in a partnership

The partnership itself does not pay income tax. In partnership, charitable contributions are passed

through to the partners on their individual Schedule K-1 form each year. They are reported on

Line 13 of Schedule K-1. The type of contribution is identified by a letter code. In cases where

the partnership makes non-cash contributions of items in excess of $5000, the partnership has to
file Form 8283 and Form 1065. It also has to issue each partner a copy to be filed with their

individual Form 1040.

 A 100% S corporation shareholder

S corporations operate like partnerships in terms of how business charitable contribution is

treated for tax purposes. The individual shareholders receive a Schedule K-1 showing their share

of any of the corporation’s charitable contributions.

Example of a requirement of a qualified charitable contribution:

Individuals can only make up to $100,000 direct transfer from their individual retirement account

to charity as a qualified charitable contribution. The age requirement for eligibility to make a

QCD is 70½, and the QCDs are limited to the otherwise taxable ordinary income amount.

How the different rules might affect a decision to make a charitable contribution

In addition to the obvious effects such as only those above the age of 70 ½ years being able to

opt for it as a way to make charitable contributions, QCD excludes the amount donated from

taxable income. This keeps taxable income lower and may therefore reduce the impact to certain

tax credits and deductions. This is therefore likely to be an incentive for those of eligible age to

opt for QCD.

References
Murray, J. (2018). How to Deduct Charitable Donations. Retrieved from

https://www.thebalancesmb.com/can-my-business-deduct-charitable-contributions-397602

FMR LLC. (2019). Qualified Charitable Distributions (QCDs). Retrieved from

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds