While corporations are entitled to tax deductions for charitable
donations they make, the maximum deduction for any tax year is 10% of the
corporation's taxable income. For this purpose, however, taxable income
must be specially computed without regard to the following:
(1) the charitable deduction
itself, of course (which has not yet been determined).
(2) the special corporate
deduction for dividends received (generally 70% of the dividends received).
(3) any net operating loss (NOL)
carried back into the year from a future tax year.
(4) any capital loss carried
back into the year from a future tax year.
Note that in 3 and 4, above, only if the NOL or capital loss is being
carried back into the year from a future tax year is it disregarded. An NOL
or capital loss that is carried forward into the year from an earlier year
is used in determining taxable income for purposes of the charitable
donation limitation.
Example (1): In Year 1, XYZ Corp. has $200,000 in earnings from
its operations, $20,000 of capital gain, and $10,000 in dividend income from
corporations in which its interest is below 20%. It has $40,000 in tax
deductions not counting a charitable deduction or the dividends received
deduction. It donated $25,000 to qualifying charities in Year 1. In Year
2, XYZ has a $5,000 capital loss which is carried back into Year 1.
The Year 1 charitable deduction is limited to $19,000: 10% of taxable
income of $190,000 as determined solely for these purposes. The $190,000
figure is arrived at by adding the earnings ($200,000), the capital gain
without reduction for the Year 2 capital loss carryback ($20,000), and the
dividend income without regard to the dividend received deduction ($10,000).
This total of $230,000 is then reduced by deductions other than the
charitable deduction ($40,000) to obtain $190,000.
XYZ's “real” taxable income can then be computed as follows: $200,000
earnings, plus $15,000 capital gains after the loss carryback, plus $10,000
in dividends, but minus a $7,000 (70%) dividends received deduction, the
$19,000 charitable deduction, and the $40,000 remaining deductions. This
comes to $159,000.
Charitable contribution carryovers. Any charitable
donations which cannot be deducted due to the limitation discussed above are
carried forward into the following year where they can be deducted on top of
the corporation's deduction for contributions made in that following year,
subject to the same limitation as it applies in that year. If it can still
not be deducted in the following year, it continues to be carried forward.
However, if it is not used within five years after the year of the
donation, it expires. Note as well that charitable donations in excess of
the limitation amount can never be carried back to an earlier year, only
forward.
If a contribution of property (as opposed to cash) is made by the
corporation, the same rules that apply to noncorporate taxpayer
contributions apply to determine the amount of the donation. These rules
are applied first and then the total amount donated during the year is
subject to the 10% limitation.
