The deductibility of most charitable gifts hasn’t changed since passage of the Tax Cuts and Jobs Act, but some recordkeeping requirements have. Helping your donors who itemize deductions understand the rules and benefits of their gifts can strengthen your not-for-profit’s ties with them — and may help increase contributions.

Allowable deductions

Generally, donors can deduct total contributions of money or property up to 60% of their adjusted gross income. The amount of the allowable deduction varies, but cash donations are 100% deductible if the donor maintains proof (such as bank records or thank-you letters from your nonprofit).

Donations of ordinary-income property usually are limited to the donor’s tax basis in the property (usually the purchase price). Specifically, donors can deduct the property’s fair market value (FMV) less the amount that would be ordinary income or short-term capital gains if they sold the property at FMV. Property is ordinary-income property when donors would recognize ordinary income or short-term capital gains if they sold it at FMV on the date of donation.

When FMV applies

Donors of capital gains property usually can deduct the property’s FMV. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property may be deducted.

If your nonprofit uses tangible donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use (a hospital sells the donated painting) the deduction is limited to the donor’s basis in the property.

For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth:

• Less than $250, a receipt is sufficient.
• Between $250 and $500, the donor must have contemporaneous written acknowledgment.
• Between $501 and $5,000, the donor must also file Form 8283.
• More than $5,000, the donor must obtain a qualified appraisal.

Other donations

In general, only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation contribution.

Donors can’t claim a deduction for the donation of their professional services. However, related out-of-pocket costs, such as supplies and miles driven, are deductible as charitable contributions.

Look out for their interests

Take time to make sure your donors understand the tax implications of their gifts. It can help them avoid unpleasant surprises down the road — and keep them loyal to your nonprofit. Contact us with questions.

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Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.

How the credit works

The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

How it works

Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.

The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.

Get the credit you’re due

If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.

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The novel coronavirus (COVID-19) crisis has put enormous financial stress on many not-for-profits — whether they’re temporarily shut down or actively fighting the pandemic. If cash flow has dried up, your organization may need to do more than trim expenses. Here’s how to assess your financial condition and take appropriate action.

Put your board in charge

Ask your board of directors to lead your review and retrenchment efforts. In addition to having oversight experience and financial expertise, board members have a passion for your organization and will do whatever they can to assist. They may already have employer backing for your nonprofit, and those companies may be willing to step up their financial support. Or board members may be able to tap their social networks.

The first order of business should be to review programs relative to your nonprofit’s mission. If you identify one that isn’t critical to your mission and is a drain on cash balances and staff resources, consider cutting it. Terminating a non-mission-critical program frees up funds for other initiatives or administrative necessities. If you can redirect clients to similar programs offered by other organizations, such changes can be made without a break in service.

Your board may also be able to liberate cash from your investment portfolio. Your nonprofit may have investments or idle assets that aren’t generating operating income — for example, donated real estate, collections and other nonmarketable holdings. Divesting these possessions can raise critical operating funds.

Look to your endowment

Another potential source of operating funds is your organization’s permanently restricted endowment funds. Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), you may be able to spend what was once considered the untouchable original principal (or historical balance) of funds.

Access generally is available when the donor of the original gift is silent about restrictions or hasn’t specified that UPMIFA provisions don’t apply. In some cases, an original condition or restriction may no longer be practicable or possible to achieve. Your nonprofit should consult an attorney to learn whether this is an option.

If UPMIFA provisions don’t open up a source of funds, there’s another potential route — approach the original donor. Your organization can ask the donor to lift all or some of the spending restrictions so you may use a portion of the funds for operating costs.

We can help

These are only a few possible solutions for struggling nonprofits. If you know your nonprofit is in trouble, but don’t know how to start fixing it, contact us. We can work with your board to assess your situation and determine the best way to move forward.

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Whether you’re moving to another country for work-related reasons, retirement or simply want an opportunity to experience a new culture, it’s important to understand the potential tax and estate planning implications. If you don’t, you could be hit with some unpleasant surprises. Here are three possible pitfalls:

Double taxation. If you’re a citizen of the United States, U.S. taxes will apply even after you move to another country. So if your estate is large, you might be subject to gift and estate taxes in your new country and in the United States (possibly including state taxes if you maintain a residence in a U.S. state). You also could be subject to estate taxes abroad even if your estate isn’t large enough to be subject to U.S. estate taxes. In some cases, you can claim a credit against U.S. taxes for taxes you pay to another country, but these credits aren’t always available.

One option for avoiding U.S. taxes is to relinquish your U.S. citizenship. But this strategy raises a host of legal and tax issues of its own, including potential liability for a one-time “expatriation tax.”

Real estate issues. If you wish to purchase a home in a foreign country, you may discover that your ability to acquire property is restricted. Some countries, for example, prohibit foreigners from owning real estate that’s within a certain distance from the coast or even throughout the country. It may be possible to bypass these restrictions by using a corporation or trust to hold property, but this can create burdensome tax issues for U.S. citizens.

Unfamiliar inheritance rules. If you own real estate or other property in a foreign country, your heirs may run up against unusual inheritance rules. In some countries, for example, your children have priority over your spouse, regardless of the terms of your will.

Review before you relocate

If you’re considering a move overseas, discuss your plans with us before making a move. We can review your estate plan and finances and make recommendations to help avoid tax pitfalls after you relocate.

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