Community Connection
Professional Advisors Edition - November 2020
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An Eye Toward Year-End Tax Planning |
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Appreciated stock, anyone?
Yes, 2020’s stock market has been a rollercoaster, but as you guide your clients into year-end, don’t forget the powerful benefits of giving appreciated securities to a donor-advised fund at the Community Foundation of Central Illinois. Now is the time to start helping your clients with tax planning. Remember, not all stock is down! For many clients, 2020 is an excellent year for year-end giving.
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Closely-held business exits
Clients who are preparing to sell a business should start thinking ahead about charitable planning. Before any deal is struck, or any binding commitments discussed, encourage your client to consider the benefits of making a gift of their closely-held stock to a charitable entity, such as a donor-advised fund at the Community Foundation of Central Illinois. Remember, though, that the “step transaction” doctrine is still very much alive and well. The IRS could argue that the transfer of stock to a charity should be treated as “combined” with the sale of the stock, thereby eliminating the tax benefits of the charitable transaction. The IRS could win this argument if the facts indicate that the multiple “steps” in the process were really just a single-step transaction when considering the intent and economic reality of the taxpayer’s actions.
Back door Roth IRA conversions
Last but not least, consider the step transaction doctrine when you are advising your high income-earning clients on whether to pursue the so-called “back door” Roth IRA planning strategy. When a client’s modified adjusted gross income crosses the IRS’s designated phase-out thresholds, contributions to a Roth are no longer permitted. Contributions to a traditional IRA, however, are not subject to income limitations. In addition, there are no income limits on who can convert from a traditional IRA to a Roth. So, with the “back door” strategy, your client makes a contribution to a traditional IRA using after-tax dollars and then executes a tax-free Roth conversion. Consider carefully researching these issues and even advising clients to wait several months between the contribution and the conversion, just in case.
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Corporate Giving Programs: Opportunity in the COVID Era |
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According to the just-released 2020 Porter Novelli Executive Purpose Study, more than 80% of large company executives believe for-profit companies have a responsibility to play a role in resolving social issues. The study also found that most executives believe a social impact strategy improves customer loyalty (93%) and helps motivate a buying decision (91%).
How should you approach advising your corporate clients about the structure for their social impact programs, especially now that those programs play an increasingly important role in philanthropy?
Encourage corporate clients to consider the component parts of a well-rounded corporate social responsibility program, such as:
Mission
Embrace and follow an overarching mission statement, consistent with the purpose of the business and integrated into the company’s objectives for success to reinforce the company’s values in the community.
Structure
Typically, a corporate foundation serves as the hub--or at least a key part--of the overall corporate social responsibility program. Companies are wise to evaluate what type of corporate foundation structure would be most effective. For example, a corporate donor-advised fund at the community foundation can be established as a tax-advantageous “ABC Corporation Foundation,” allowing the company and its team to stay in the forefront as the face of the corporate foundation while utilizing the behind-the-scenes capabilities of the community foundation to process grants, handle accounting, receive and process gift transactions, and maintain records.
Alignment
A strong program includes a mechanism for ongoing cause identification and research to stay current with employee, customer, and community trends. It also helps when a company can make a case for why corporate causes are aligned with the business’s purpose and the needs of the overall population of its industry or marketplace.
Engagement
Employee engagement and participation in a company’s community relations and investment program will drive employee loyalty and retention and, in turn, consumer brand engagement. Companies should harness the enthusiasm of employee-led volunteer and fundraising activities.
Communications & Sales
Celebrate the company’s program in a manner that is integrated with, and complementary to, the company’s overall brand image and public relations strategies. This occurs in the media, through events, on the website, in printed materials, and social media.
Evaluation & Reporting
Best practices suggest ongoing monitoring of the results of the program against one or more indicators of success, including employee engagement, employee loyalty, operating efficiency, community impact of money invested, customer perception, and marketplace reputation.
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The Power of Planning: Bundling, Bunching, and Bequests |
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The significant community needs arising from the events of 2020, coupled with recent tax law changes, make it very important that you help your clients plan their charitable giving strategies.
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The popularity of this tool increased significantly under the Tax Cuts and Jobs Act provisions that reduced the incentive for taxpayers to itemize deductions on their income tax returns, starting with tax year 2018, because of the now doubled standard deduction. In other words, your clients now have to give a lot more to charity to reap the tax benefits.
“Bundling” or “bunching” can involve using a donor-advised fund to separate the tax event of the charitable gift itself from the financial support of charities. Because contributions to a donor-advised fund at the Community Foundation of Central Illinois are immediately deductible for tax purposes--but not required to be granted out of the fund to charities right away--your clients can “frontload” donations into a donor-advised fund at a level where they will be able to take advantage of itemizing deductions. Then, your client can recommend grants from the donor-advised fund to their favorite charities according to the timeframe that aligns with their targets for providing philanthropic support to community organizations.
Finally, as you are assisting your clients with their charitable plans, now is no time to forget about bequests! A report issued by FreeWill cites a 400 percent increase in the number of wills with bequests in March 2020 compared with March 2019. Encourage your clients to think about their legacies, especially as they reflect on the ways 2020 has put a spotlight on just how important it is for communities to be able to rely on sustainable nonprofit organizations to help people in need.
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Gifts in Kind: Take Note of New Accounting Rules |
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Gifts in kind have played an important role in pandemic relief efforts, with more than $200 million worth of goods already contributed to help those affected by COVID-19. Giving inventory, contributing the use of fixed assets, and donating pharmaceuticals are just a few examples of ways your clients may be supporting the causes they love, especially during the giving season and over the holidays.
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As you advise clients--whether businesses, individuals, or nonprofit organizations--about the reporting requirements and taxation of gifts in kind, take note of new guidance issued by the Financial Accounting Standards Board (FASB) in a recent Accounting Standards Update for the presentation and disclosure of contributed nonfinancial assets. The new standards take effect next year.
Nothing has changed about the proper way to value and recognize gifts in kind. Reporting entities, however, are now required to disclose more details about valuation and use of the donated goods and present these details more prominently, including as a separate line item in the statement of activities.
The change is part of a continuing effort to achieve more transparency in charitable giving and maintain integrity in tax-deductible transactions.
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The CARES Act and Community: Three 2020 Upsides |
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Silver linings are hard to find this year, but it’s worth remembering that the CARES Act created important opportunities for your clients to increase their giving to charitable causes.
Keep these three tools in mind as you are assisting clients with year-end tax planning:
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Even for taxpayers who take the standard deduction, a reduction in adjusted gross income is available for charitable contributions up to $300 per taxpayer. Donations to donor-advised funds don’t count; nonetheless, this deduction is a great way for clients to help their favorite organizations.
- Individuals who itemize deductions can elect to deduct donations up to 100% of their 2020 adjusted gross income instead of being capped at 60%. For corporations, the CARES Act increased the cap from 10% to 25% of taxable income. (Again, contributions to donor-advised funds and private foundations are not eligible.)
- For many clients, the waiver of the Required Minimum Distribution for 2020 could create an economic incentive to redirect tax savings to charitable giving. And of course, nothing has changed about the rules for Qualified Charitable Distributions, which permit both itemizers and non-itemizers to direct up to $100,000 from an IRA to qualifying charities without triggering a taxable event.
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For Fundholders:
Please make all gifts (deposits into your fund) by Monday, November 23.
Please make all grants (donations to nonprofits) by Friday, December 4.
If you have any questions, please contact Jacqueline at jacqueline@communityfoundationci.org
or 309-674-8730.
Community Foundation Holiday Hours
CLOSED: Thursday & Friday, November 26-27
CLOSED: Thursday & Friday, December 24-25
CLOSED: Thursday, December 31 at 12pm
CLOSED: Friday, January 1
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3625 North Sheridan Road
Peoria, IL 61604
309-674-8730
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