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S Corporation Charitable Deduction Timing
In Rev. Rul. 2000-43, the IRS held that an S Corporation's charitable deduction must be taken in the year the charitable contribution is actually made rather than in the year the contribution is authorized.
Revenue Ruling 2000-43
In Rev. Rul. 2000-43, the board of directors of an accrual-basis, calendar-year S Corporation authorized a charitable contribution on December 31, 1999. The S Corporation actually made the contribution on March 1, 2000. The S Corporation elected to treat the contribution as made in the year of authorization under Code Section 170(a)(2), which allows a corporation reporting its taxable income on the accrual basis to elect to deduct a charitable contribution in the year that the board authorized the contribution as long as the contribution is made by the 15th day of the third month following the close of the taxable year.
The IRS ruled that the S Corporation must report the charitable contribution in 2000, the year the contribution was made. According to the IRS, an S Corporation may not elect under Code Section 170(a)(2) to treat a charitable contribution as made in the year of authorization because an S Corporation reports its taxable income in the same manner as an individual pursuant to Code Section 1363(b) and the election under Code Section 170(a)(2) is not available to an individual. In addition, the IRS noted that the rationale underlying Code Section 170(a)(2) is that a corporation may have difficulty in determining its charitable contribution limit under Code Section 170(b)(2) and this rationale does not apply to an S Corporation because the S Corporation is not subject to the same Code Section 170(b)(2) limit.
POINTS TO PONDER:
When might it be advantageous for a C Corporation use the election in Code Section 170(a)(2)?
May an accrual-basis subchapter S corporation elect under section 170(a)(2) of the Internal Revenue Code to treat a charitable contribution as paid in the year authorized by the S corporation's Board of Directors if the contribution is paid by the S corporation after the close of the taxable year and before the 15th day of the third month following the close of the taxable year?
Taxpayer is the sole shareholder of an accrual-basis subchapter S corporation. The S corporation reports on a calendar year period. On December 31, 1999, the S corporation's Board of Directors authorized a charitable contribution to Charity, a qualified donee under section 170(c)(2) and an organization described under section 501(c)(3). The S corporation paid the charitable contribution to Charity on March 1, 2000.
LAW AND ANALYSIS
Section 170(a)(1) allows as a deduction any charitable contribution (as defined in section 170(c)) the payment of which is made within the taxable year. Under section 170(b)(1), the percentage limitation on charitable contributions for an individual is 50 percent, 30 percent, or 20 percent of the taxpayer's contribution base (generally adjusted gross income) for the taxable year, depending generally on the type of property contributed and the type of qualified donee. Under section 170(b)(2), the percentage limitation on charitable contributions by a corporation is 10 percent of the taxpayer's taxable income with certain adjustments.
Under section 170(a)(2), a corporation reporting its taxable income on the accrual basis may elect to deduct a charitable contribution in the year in which the board of directors authorizes the contribution, if the payment is made by the 15th day of the third month following the close of the taxable year. The election may be made only at the time of the filing of the return for the taxable year and is made by reporting the contribution on the return. See section 1.170A-11(b)(2) of the Income Tax Regulations.
The legislative history to section 170(a)(2) provides that the exception for accrual basis corporations was desirable because corporations intending to make the maximum charitable contribution allowable as a deduction had experienced difficulty in determining before the end of the taxable year what constituted 5 percent of their net income (the section 170(b) gross income limitation for corporations at the time of enactment). S. Rep. No. 831, 81st Cong., 1st Sess. at 1949-2 C.B. 289, 290-1.
Section 1363(b) states that the taxable income of an S corporation is computed in the same manner as in the case of an individual with certain exceptions, among which is an exception that the deductions referred to in section 703(a)(2) are not allowed to the corporation. Section 703(a)(2)(C) specifically refers to the deduction for charitable contributions provided in section 170.
Section 1366(a)(1)(A) provides that in determining the tax of a shareholder, each shareholder takes into account the shareholder's pro rata share of the corporation's items of income (including tax-exempt income), loss, deduction or credit, the separate treatment of which could affect any shareholder's tax liability. Section 1366(a)(1) provides further that the items referred to in section 1366(a)(1)(A) include amounts described in section 702(a)(4). Section 702(a)(4) refers to charitable contributions (as defined in section 170(c)).
Section 1.1366-1(a)(2)(iii) provides that the separately stated items of a Subchapter S corporation include charitable contributions, grouped by the percentage limitations of section 170(b), paid by the corporation within the taxable year of the corporation.
The legislative history of section 1366 states that the corporate limitation on charitable contributions will no longer apply. Instead, charitable contributions by S corporations will pass through to the shareholders and be subject to the individual limitations on deductibility. See H.R. Rep. No. 826, 97th Cong., 2d Sess. 14 (1982); S. Rep. No.640, 97th Cong., 2d Sess. 16 (1982).
Under section 1363(b), a subchapter S corporation computes its taxable income in the same manner as an individual. The election in section 170(a)(2) is not available to an individual. An individual taxpayer may deduct a charitable contribution only in the year in which payment is actually made to the charitable organization. Furthermore, the rationale behind section 170(a)(2), a corporation's difficulty in determining its charitable contribution limit under section 170(b)(2), does not apply to subchapter S corporations because a subchapter S corporation is not subject to the same section 170(b)(2) limit.
Accordingly, under the facts described above, the S corporation must report the charitable contribution on its tax return for the year in which it actually paid the charitable contribution, the taxable year ending December 31, 2000.
An accrual-basis subchapter S corporation may not elect under section 170(a)(2) to treat a charitable contribution as paid in the year authorized by the S corporation's Board of Directors if the contribution is paid by the S corporation after the close of the taxable year,
The principal author of this revenue ruling is Martin Schaffer of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Martin Schaffer at (202) 622-3080 (not a toll-free call).