Recently released Federal Tax Regulations provide a potential dual benefit for individual owners of specified pass-through business entities (PTEs) who donate to scholarship granting organizations (SGOs).
Under the Final Regulations, a payment made by C corporations and PTEs to a charitable organization may qualify as an ordinary and necessary business expense deduction. By characterizing a charitable donation to an SGO as a business expense. C corporations and PTEs may reduce their taxable income at the entity-level, and the individual owners of PTEs receive state and local tax (SALT) credits. The SALT credit generated by the business's donation can be applied to the individuals state tax liability, providing possible relief on the federal cap of $10,000 on the SALT deduction.
Your business could reduce its taxable income with a deductible expense on the federal side, and you could reduce your personal Alabama state income tax liability for dollar-for-dollar in the amount of your business’ contribution. The net effect is potentially a combined federal and state tax benefit greater than the total dollar amount of the donation.
Any assessment of whether your business could meet the provisions of the new regulations must be based on your particular facts and circumstances.
WHEN DOES A CHARITABLE DONATION QUALIFY AS A BUSINESS EXPENSE?
If the payment is a reasonable, ordinary and necessary expenditure incurred in carrying ont eh trade or business, and the entity "reasonably believes the program will generate a significant degree of name recognition and goodwill in the communities where it operates and thereby increases its revenue," then the donation may qualify as a business expense.
For more information, download our Business Individual Flyer 2023 and consult your tax professional.
See our 2022 Annual Report.