Charitable Contributions – Robert Bell, CPA, Auditor

The IRS has clarified how corporate taxpayers should be calculating their charitable contribution deductions and the use of charitable contribution carryovers. Further, the IRS has clarified the ordering rules with respect to the interplay between charitable contributions and prior year net operating losses (NOLs). To prevent doubling up on tax benefits, IRS Code Section 170(d)(2)(B) requires that a taxpayer’s charitable contributions are reduced by modified taxable income to the extent excess contribution deductions increase NOLs.

According to Internal Revenue Code, charitable contributions shall not exceed 10 percent of the corporate taxpayer’s taxable income. Taxable income is computed without regard to the charitable contribution deduction; however, NOL carryovers from prior tax years are considered when calculating taxable income for purposes of the 10 percent limitation. Conversely, modified taxable income is determined without NOL carryovers, but does consider charitable contribution carryovers.

As a result, more contributions may be used in computing modified taxable income than allowed in computing taxable income, which ultimately results in less modified taxable income and less NOL being utilized. The additional contributions utilized will increase the amount of NOL carry forward to subsequent years.

The additional contributions used in calculating modified taxable income are not actually deducted in computing taxable income; rather the resulting contribution carryforward is reduced to the extent that excess contributions reduce modified taxable income and increase the NOL carryforward. The effect is that some contributions with five-year carryforward periods are converted to NOLs with indefinite carryover periods.