I have been going through the provisions of the new
tax bill (One Big Beautiful Bill Act), which I refer to as OB3 (Oh Bee Three).
I like the Star Wars reverb to it.
You ever wonder how the tax Code gets so complicated?
I can understand if one is already in a complex area
to begin with. Take an international conglomerate, sprinkle in some treaty
relief, add transfer pricing creativity and bake off for FDDEI minutes and it makes
sense.
But what about something routine – something like
charitable contributions?
Let’s talk about OB3 and contributions.
We will separate our discussion into two sections: contributions
for C corporations and contributions for individuals.
C Corporations
For years, the rule for C corporation contributions
has been simple: there is a limit of 10% of taxable income before any
charitable deduction.
EXAMPLE ONE:
Blue Sky Corp has taxable
income of $1 million before a charitable deduction of $105,000. Blue Sky can
deduct $100,000 ($1 million times 10%). The $5,000 balance carries forward to
the next tax year.
Let’s call that 10% the ceiling. It has been tax law
since I came out of school.
OB3 has introduced a floor. The new law is that C
corporation contributions are allowed only to the extent they exceed 1% of
taxable income before any charitable deduction.
EXAMPLE TWO:
Let’s return to Blue Sky, which made charitable
contributions of $9,000. Well, 1% of $1 million is $10 grand. $9 grand is less
than $10 grand, so Blue Sky gets no deduction at all.
But wait, it gets better.
There is a macabre dance between the ceiling and the
floor.
· Contributions
in excess of the 10% ceiling may be carried forward.
· Contributions
cut off at the knees by the 1% floor may be carried forward, BUT ONLY IF the
corporation’s contributions exceed the ceiling.
What are they talking about?
The ceiling (sub) rule has been with us for decades.
In Example One, the $5,000 may be carried forward up to five years.
The floor (sub) rule is … peculiar.
Let’s go back to Example Two. Blue Sky did not clear
the floor and did not exceed the ceiling. Blue Sky loses that $9 grand as a
deduction forever. Blue Sky is grey.
Let’s tweak
Example Two and call it EXAMPLE THREE:
Blue Sky makes contributions of $125,000.
Blue Sky loses the first 1%, which is $10 grand ($1 million times 1%).
At this point we still have $115,000 at play.
To be cut off at $100 grand, leaving $15,000.
However, since Blue Sky exceeded BOTH the ceiling (by $15 grand) and the floor, it gets to carryforward both the $15 grand (ceiling) and the $10 grand (floor) for a total carryforward of $25 grand.
Another way to say this is: if you clear both the floor and the ceiling, you are back to the old rule ($125,000 minus $100,000).
But look at the hoops you must go through to get back to where you were.
Congress has malintent, methinks.
Individuals
We also have a shiny new contribution floor for
individuals. The floor is ½ of 1%, so it is less than a corporation.
The new rule for Individual contributions works solely
off the floor, so we avoid the double Dutch dilemma of Example Three.
On to EXAMPLE FOUR:
Bo Runs-Like-A-Gazelle plays in the NFL and makes $7 million.
Bo’s charitable floor is $7 million times .005 = $35 grand.
Bo makes contributions of $33,000 grand.
Bo did not clear the floor, so Bo gets no charitable deduction.
However, does Bo at least get to carryforward the $33
grand?
No, Bo does not.
Bo is hosed.
Let’s tweak for EXAMPLE FIVE:
Same as Example Four but Bo donates $50 grand.
His floor is still $35 grand.
Bo has a deduction of $15 grand.
However since Bo cleared the floor, he gets to carry over the $35 grand (the floor) to future tax years.
Bo is less hosed.
There is another grenade from OB3 that might also
affect Bo: if his tax rate ever exceeds 35%, the tax benefit from a charitable
contribution will stop at 35%. We will leave that tax twister for another day.
There is a positive provision in OB3 for nonitemizers:
beginning in 2026 one will be able to deduct $1,000 (if single) or $2,000 (if
married) for cash contributions. Yep, you will be able to claim the standard deduction
and another grand (or two), assuming you made contributions. It's something.
Congress continues to add complexity to the Code, and
not just for heavy hitters like Bo. Unfortunately, these rules might (in fact, they
probably will) affect you and me – average folk. So why did Congress do
it? Same reason junkies steal: Congress
is addicted. There is no other reason for nonsense like this.
How will tax advisors react? We will educate clients
on ceilings and floors, and we will continue to emphasize “bunching.” Bunching
means that you make an oversized donation in one year and a much smaller (or
no) donation the following year. It can be rough on the receiving charity (can
you imagine budgeting), but what are you (as a donor) to do?
