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Leading with Charity

Family business owners know that combining charity and family can be beneficial in many ways, including helping family members develop moral and social values. When it comes to the mechanics of charitable giving, tax considerations become significant. Unfortunately, the alternatives are numerous, confusing and sometimes treacherous.

Thorough coverage of the tax rules and limitations is impossible in a newsletter. In fact, if you want the gory details, Arthur Andersen recently published the 13th edition of its renowned publication, Tax Economics of Charitable Giving, containing about 300 pages of discussion. (Vantage Source 1-800-872-2454, $65.10 plus sales tax, shipping and handling; or order online at vantagesource@us.arthurandersen.com.)

However, in this and future columns, I’ll try to put the matter and issues in perspective.

Perhaps family business owners’ most common approaches to charitable giving are outright gifts to public charities and private foundations. The amount of the deduction depends upon:

  • The type of charity
  • The type of property donated, and, in some cases, whether the property is used by the charity in its exempt function
  • The individual donor’s specific tax circumstances.

The table indicates the deduction amount, which may be either the property’s cost basis or its fair market value (FMV). It also indicates the maximum percentage of adjusted gross income (AGI) that an individual donor can offset with contributions during a year. Contributions in excess of the AGI limitation can be carried forward to and deducted in the next five years, again subject to the percentage limitations. [table omitted]

After determining your allowable charitable deduction amounts and subjecting total contributions to the AGI percentage limitations, there is a further limitation on itemized deductions, including contributions. Reduce your itemized deductions (e.g., contributions, home mortgage interest, and state and local taxes) by the excess of three percent of your adjusted gross income over approximately $126,000 (for married couples). Despite this reduction, you can always deduct at least 20% of your itemized deductions.

Whew! Believe it or not, I haven’t covered all the tax exceptions and special rules. The moral for even these most common forms of contributions is to get your tax advisor to do some analysis and calculations for you before you make sizeable contributions.

Regardless of tax benefit, involve your children in the process of evaluating and selecting charitable recipients. Some families create private foundations expressly for this purpose. But, you can do it informally, just by getting the family involved in corporate-level or personal giving plans.

The depth and complexity of discussions obviously must be geared to their ages and maturity levels. However, I believe you can have meaningful discussions about the following almost regardless of the children’s ages:

  • Needs and problems that exist in society.
  • The possible causes behind these needs and problems.
  • Ways to encourage people to be productive and achieve their potential.
  • How your business’ success allows the family to help satisfy these needs and resolve problems.
  • How money can help deal with these problems, but why money alone is not enough.
  • Why government alone cannot solve all of the problems.

Don’t preach. Get the family members to talk. Discuss these and related issues a little at a time to work the family into it. This is not a one-meeting matter.

You also should consider contributing your time and energies to the causes that you select. Perhaps more importantly, try to involve your children as well. Even if all you do is take them to visit the charity or see the money being used, you are likely to create a meaningful impression on them.

Stay tuned next month for more sophisticated ways to combine charitable giving with tax and wealth transfer planning.

 

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