Treatment of Charitable Contributions Post-Tax Reform May Impact S Corp Distributions
As a result of the new tax bill signed into law in December, analysts predict that far fewer Americans will itemize their income tax deductions starting in 2018. This change creates much of the tax code simplicity promised by the Republican administration. And for S Corporations that pass through certain deductions including charitable contributions to their shareholders, it is important to understand the impact of this change.
For 2017, a married couple filing a joint tax return could take a standard deduction of $12,700. Beginning in 2018, the standard deduction for married couples will rise to $24,000. This increase will mean that fewer individuals will see the benefits from itemizing and will default to the standard deduction.
With changes to the home mortgage interest deduction and state and local income taxes, it will also be more difficult for even higher income individuals to exceed the new standard deduction threshold.
Historically, most financial institutions have assumed that any charitable contributions made by the corporation and passed to the shareholders on Schedule K-1 would be fully deductible at the shareholder level. But in light of the new tax rules, management may need to rethink this assessment.
If charitable giving is a significant part of your budget, it may be appropriate to adjust your quarterly distribution calculation to ensure that shareholders are provided adequate tax distributions to cover their federal and state tax liability even if they don’t itemize.
Financial institutions are a vital part of local communities and are often eager to contribute, but it is important that management and the board understand the tax impact of these contributions given the new tax law.
CLA is here to help. Our financial institution team can assist you in analyzing how the tax reform changes will impact your institution and its shareholders.
Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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