Once again, the grocery store bell ringers are out with red buckets seeking spare change in this giving time of the year. Yet a pall rests over the season due to pandemic-related economic reversals felt by even the jolliest of citizens. It is rumored that Rudolph, Prancer, and Vixen were furloughed, and Santa will lighten his sleigh load to compensate for the reduced reindeer power – yet another reduction in world-wide economic commerce. Fortunately for the workless white tails, the combination of their famous names allowed them to start their own aviation consulting firm. They should be making big bucks soon enough! But does the current tax code provide any incentives for year-end giving to our trio of furry entrepreneurs? The answer is a “stag”gering yes!
Corporate Taxpayer Charitable Giving Incentives
Corporate taxpayer charitable giving has been enhanced under the CARES Act:
- A C-corporation pays taxes on its taxable income (unlike an S-corporation which passes-thru taxable income to be taxed by its shareholders) and was generally limited in its ability to deduct charitable contributions to 10% of its taxable income. The CARES Act increases the percentage to 25% of a corporation’s taxable income for 2020.
- Likewise, if a corporation is in the food industry, prior to the CARES Act, a corporation could contribute food inventory to a qualified charitable public charity with a value of up to 15% of corporate taxable income. The CARES Act increased the applicable percentage to 25% for contributions made in 2020.
- A common year-end gifting strategy is for business owners to gift units of equity interest to family members as part of a planned, often inter-generational, transfer of business equity (and eventually, control) of a business enterprise. Such a giving plan takes advantage of two value-deflating techniques:
- The annual gift tax exclusion amount which is the maximum amount an individual may gift to another individual in a single calendar year without incurring a federal gift tax obligation. For 2020 and 2021, that amount is $15,000.
- The ability to claim a valuation discount for equities that are burdened with lack of marketability caused by onerous transfer restrictions and/or non-controlling percentages of individual ownership.
An equity gifting plan is relatively easy to establish and administer but this year-end takes on added urgency due to a recent SBA Procedural Notice regarding the Paycheck Protection Program (PPP) and the results of the Presidential election. The SBA Procedural Notice, issued October 2, 2020, discusses the effect of certain “change of ownership” events on whether SBA approval is required for such events when a company has received PPP loans and has not yet filed its application for forgiveness with SBA.
A “change of ownership” is deemed to have occurred for these purposes when at least 20% of the “common stock or other ownership interest” of a company is sold or “otherwise transferred”. “Otherwise transferred” is not defined in the Notice so it is unclear whether the gifting of equities is intended to be included in the events that night invoke SBA powers of approval.
While a year-end equity gifting plan would usually not result in 20% or more of a company’s equity being transferred all at once, it could be that 2020 is the year when the annual gifts made results in the total of such equity reaching 20% of all equity (or for that matter, 50+ % of all equity).
According to the SBA notice, “For purposes of determining a change of ownership, all sales and other transfers occurring since the date of
approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met.” (emphasis added). Again, it is ambiguous whether equity gifting is intended to be included but if so, it is likely that equity gifting would occur “since the date of approval of the PPP loan” since often equity gifts become effective on the last day of the calendar year to avoid income allocation complexities. With only two weeks left in 202, you can be assured that many year-end gifts of equity will occur between parties ignorant of these relevant SBA issues.
Also, consider that the apparent winner of the U.S. Presidential election, Joe Biden, called for a severe reduction in the gift and estate lifetime exemption amounts created by the 2017 tax reform. In 2021, the lifetime exemption amount is set to rise to $11.7 million meaning a person can give that much away to their heirs (either at death or during their lifetime) without paying any estate or gift tax on top of the annual gift exclusion referenced earlier. Criticizing the Trump tax cut as a giveaway to the wealthy and citing economic inequality, Biden proposed restoring estate and gift taxes to their 2009 level: $3.5 million per person for the estate tax, $1 million for the gift tax, and a top rate of 45%. It’s anyone’s guess if such a change in the current law could pass Congress. But it does provide an incentive for wealthier taxpayers to use the rest of their current lifetime exemption amounts in 2020.
- Let’s finish by discussing a real gift! The CARES Act corrected the drafting flub that haunted the 2017 tax reform act regarding “Qualified Improvement Property” (or “QIP”). You may recall that Congress explicitly intended that QIP be included as property eligible for 100% bonus depreciation, but the legislation did not reflect that intent, so QIP was left to be depreciated over 39 years. However, the CARES Act corrected the statute retroactively so no more lump of coal for QIP this year.
- Congress is debating another stimulus bill that would also extend government operations into 2021 to avoid a government shutdown. Additional tax provisions affecting individuals and businesses will be identified and communicated to our clients in the near future
If any of the tax issues discussed here cause you to say, “Oh, (rein)deer!”, contact us at CPA Department and let us help 2020 end on a positive tax note.