DAFs bring an investment angle to charitable giving
If planning to make significant charitable donations in the coming year, consider a donor-advised fund (DAF). These accounts allow a person to take a charitable income tax deduction immediately, while deferring decisions about how much to give -- and to whom -- until the time is right.
Account attributes
A DAF is a tax-advantaged investment account administered by a not-for-profit "sponsoring organization," such as a community foundation or the charitable arm of a financial services firm. Contributions are treated as gifts to a Section 501(c)(3) public charity, which are deductible up to 50 percent of adjusted gross income (AGI) for cash contributions and up to 30 percent of AGI for contributions of appreciated property (such as stock). Unused deductions may be carried forward for up to five years, and funds grow tax-free until distributed.
Although contributions are irrevocable, an individual is allowed to give the account a name and recommend how the funds will be invested (among the options offered by the DAF) and distributed to charities over time. They can even name a successor adviser, or prepare written instructions, to recommend investments and charitable gifts after their death.
Technically, a DAF isn't bound to follow the donors' recommendations. But in practice, DAFs almost always respect donors' wishes. Generally, the only time a fund will refuse a donor's request is if the intended recipient isn't a qualified charity.
Key benefits
As mentioned, DAF owners can immediately deduct contributions but make gifts to charities later. Consider this scenario: Rhonda typically earns around $150,000 in AGI each year. In 2017, however, she sells her business, lifting her income to $5 million for the year.
Rhonda decides to donate $500,000 to charity, but she wants to take some time to investigate charities and spend her charitable dollars wisely. By placing $500,000 in a DAF this year, she can deduct the full amount immediately and decide how to distribute the funds in the coming years. If she waits until next year to make charitable donations, her deduction will be limited to $75,000 per year (50 percent of her AGI).
Even if the donor has a particular charity in mind, spreading donations over several years can be a good strategy. It gives the donor time to evaluate whether the charity is using the funds responsibly before they make additional gifts. A DAF allows the donor to adopt this strategy without losing the ability to deduct the full amount in the year when it will do you the most good.
Another key advantage is capital gains avoidance. An effective charitable-giving strategy is to donate appreciated assets -- such as securities or real estate. The donor is entitled to deduct the property's fair market value, and they can avoid the capital gains taxes they would have owed had they sold the property.
But not all charities are equipped to accept and manage this type of donation. Many DAFs, however, have the resources to accept contributions of appreciated assets, liquidate them and then reinvest the proceeds.
Requirements and fees
A DAF can also help streamline an estate plan and donate to a charity anonymously. Requirements and fees vary from fund to fund, however. Please contact Prince & Tuohe for help finding one that meets your needs.
Need to sell real property? Try an installment sale
If your company owns real property, or you do so individually, you may not always be able to dispose of it as quickly as you'd like. One avenue for perhaps finding a buyer a little sooner is an installment sale.
Benefits and risks
An installment sale occurs when a person transfers property in exchange for a promissory note and receive at least one payment after the tax year of the sale. Doing so allows a person to receive interest on the full amount of the promissory note, often at a higher rate than they could earn from other investments, while deferring taxes and improving cash flow.
But there may be some disadvantages for sellers. For instance, the buyer may not make all payments and you may have to deal with foreclosure.
Methodology
You generally must report an installment sale on your tax return under the "installment method." Each installment payment typically consists of interest income, return of your adjusted basis in the property and gain on the sale. For every taxable year in which you receive an installment payment, you must report as income the interest and gain components.
Calculating taxable gain involves multiplying the amount of payments, excluding interest, received in the taxable year by the gross profit ratio for the sale. The gross profit ratio is equal to the gross profit (the selling price less your adjusted basis) divided by the total contract price (the selling price less any qualifying indebtedness -- mortgages, debts and other liabilities assumed or taken by the buyer -- that doesn't exceed your basis).
The selling price includes the money and the fair market value of any other property you received for the sale of the property, selling expenses paid by the buyer and existing debt encumbering the property (regardless of whether the buyer assumes personal liability for it).
You may be considered to have received a taxable payment even if the buyer doesn't pay you directly. If the buyer assumes or pays any of your debts or expenses, it could be deemed a payment in the year of the sale. In many cases, though, the buyer's assumption of your debt is treated as a recovery of your basis, rather than a payment.
Complex rules
The rules of installment sales are complex. Please contact Prince & Tuohey to discuss this strategy further.
Prince & Tuohey CPA LTD is located at 2836 Malvern Ave. Suite D, Hot Springs, AR 71901. Call 501-262-5500 or visit website http://www.princetuohey.com for more information.
Business on 01/16/2017