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Pamela Avraham

Volunteering? Let Uncle Sam Reward You in a Deduction

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If  your contributions to charity begin and end with check writing, you may be missing out on some satisfying volunteer opportunities — and a few tax deductions. Many people volunteer for the Salvation Army, your church or temple and other charitable organizations. IRS rules allow you a number of tax breaks for contributions other than cash that you make to qualified organizations.

Traveling  There and Back

You may deduct the costs of going to and from a location where you volunteer your services. You may also deduct the costs of driving for the organization — for example, to pick up or deliver items. To compute your deduction for charitable driving, use the standard mileage rate of 14 cents per mile for 2021, per the IRS, or deduct the actual cost of your gas and oil. Either way, parking fees and tolls are also deductible.

Recoup Your Expenses

Out-of-pocket expenses you pay in giving services to a qualified organization may count as a charitable donation if you’re not reimbursed for them. You cannot deduct your personal expenses, such as child care costs, even if they are necessary for you to volunteer. You may, however, deduct the costs of buying and cleaning a uniform you’re required to wear while volunteering if it is not suitable for everyday use.

No Time to Volunteer? Gift of Appreciated Securities

Many charities accept non-cash donations. Giving investments that have increased in value can be a smart tax move. Instead of selling the investment and paying capital gains tax, donate it to a qualified organization. If you held the investment for more than one year, you generally can deduct its fair market value at the time of the donation. Remember that you’ll need a receipt from the organization to claim a tax deduction, and other records also may be required.

Some Restrictions

Contributions must be made to qualified organizations that meet IRS guidelines. Not sure? The IRS has an online tool, the Exempt Organizations Select Check, that can help. Or call IRS Tax Exempt and Government Entities Customer Account Services at 1-877-829-5500.

You can’t deduct contributions to a specific individual; the value of your time or services; personal expenses incurred while volunteering, such as the cost of meals (unless you must be away from home overnight); and appraisal fees to determine the value of donated property.

Everyone’s volunteer pattern is different. Consult with a tax professional at Urbach & Avraham, CPAs for more information on charitable donations.

Substantiating Charitable Donations for Tax Purposes

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To claim a deduction for a charitable donation, you must have certain documentation. The current tax law requirements are summarized below.

Cash contributions under $250 require a bank record and date and amount of contribution. Cash contributions of $250 or more require written acknowledgement stating whether charity provided goods/services in exchange for gift. Contributions withheld from payroll require the pay stub or Form W-2 that shows amount withheld for charity.

Property contributions less than $250 require receipt or letter from charity stating: name of organization, date and location of contribution and property description. Property contributions from $250 to $500 require written acknowledgement whether goods/services were provided in exchange for gift. Property contributions from $500 to $5,000 require Form 8283 filed with tax return stating: how and when property was acquired and cost or basis of property. Property contributions of $5,000 or more require a qualified appraisal (exceptions apply) filed with Form 8283.

Additional Tips- Here are some other points to keep in mind.

Multiple contributions. If you make multiple contributions of less than $250 to the same charity during the year, you generally should treat each contribution separately in determining the amount of the contribution and the supporting records you should have.

Donations of clothing and household items. To be deductible, these donations must be in “good used” condition or better unless you are claiming a deduction of over $500 and include a qualified appraisal of the item with your return. If you can’t get a receipt from the charity because you left items at a charity’s unattended drop site, note the charity’s name, the contribution date, and a description of the items you donated and keep it on file. Also note the donated items’ fair market values and how you determined the values.

Text message donations. If you donate money by sending a text message — to a disaster relief charity, for example — the donation will be routed through the cell phone company you use. The company forwards the amount you donate to the charity, and the charge appears on your bill. Therefore, the telephone bill showing the date and amount of your donation to the organization will serve as the proof you need to substantiate your contribution.

Everyone’s charitable gifting is different. Consult with a tax professional at Urbach & Avraham, CPAs about your charitable donation documentation.

Friendly Strategies for Charitable Giving

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Obtaining a significant tax benefit

Gift from Uncle Sam

for charitable contributions may be a little harder after the Tax Cuts and Jobs Act of 2017 (TCJA), but it’s not impossible. Here’s a look at how the TCJA has altered the tax landscape for charitable giving and three strategies that could help taxpayers get better tax mileage from their donations going forward.

What Has Changed?

Because the deduction for charitable contributions is an itemized deduction, taxpayers who claim the standard deduction receive no deduction for their contributions. That much hasn’t changed. What has changed is that standard deductions for every filing status are significantly higher under the TCJA. And since there are new limits on some itemized deductions — e.g., the deduction for state and local taxes — and others have been outright eliminated, taxpayers are less likely to benefit from itemizing.

Timing Donations With a Donor-Advised Fund

With a donor-advised fund, you make a contribution (or series of contributions) to the fund and recommend how you would like your gifts to be disbursed. Generally, the donor’s recommendations will be followed, but the sponsoring organization has the final say as to how the money is actually distributed.

Contributions to a donor-advised fund are generally tax deductible in the year they are made. So funding a donor-advised fund in a year you expect to itemize your deductions could provide a tax advantage. If desired, you could then put those dollars to use over several years by supporting your favorite charities through your donor-advised fund.

Donating Appreciated Securities

Many donor-advised funds and other public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold. Note that itemized deductions for contributions of appreciated securities are generally limited to 30% of AGI.

Making Qualified Charitable Distributions After Age 70½

A qualified charitable distribution (QCD), also known as an IRA charitable rollover, allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD).

To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. (Contributions to donor-advised funds are not eligible.) Up to $100,000 may be transferred annually.

Each individual’s tax situation is different. Please consult with a tax professional at Urbach & Avraham, CPAs to help you analyze the impact on your personal situation.

 

 

Handling Employees in Several States

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When you have employees who live in one state and work in another, things can get a bit tricky. Learn the basic rule — you generally pay taxes in the state where your team works, but it can get complicated.

Do you have employees who live in one state and work in another? You may run into this if:

  • Your company is located near a state border.
  • You have employees who travel to job sites in other states.
  • You have employees who work remotely.
  • You are expanding into new states.

Having some basic understanding of what happens will help you make the right decisions about classifying wages and avoiding penalties or amended filings later. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are quite literally all over the map. You may want to be familiar with the state legislation that applies to your team. Here are the basics.

Reciprocity agreements

Some states that border each other have entered into agreements related to allowing employees who live in one state but work in another, to have their withholding tax paid to the work state.For example, an employee who lives in Pennsylvania but commutes to southern New Jersey, for a job can have withholding tax paid to Pennsylvania rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year, which helps simplify things. Have your employee complete a nonresidency certificate to excuse him/her from tax withholding in the work state. Let your payroll provider know that your employee has an agreement in place.

If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to avoid being taxed twice.

Each state may have its own twist on taxation, so it’s best to check the local situation and not make any assumptions.

The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, you withhold state unemployment tax only in the state in which the employee is working.

When it gets complicated

Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. That means more tax complexity.

For example, consider an employee who works from his log cabin in upstate New York, but your company is located in Maryland — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.

Or at that same Maryland company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Maryland, and for three months, you pay taxes in the Pine Tree State.

Most of this information is general. It can get complicated, and there are exceptions and special circumstances. Consult with a tax professional at Urbach & Avraham, CPAs  to review your cross-border workforce, and we’ll help you organize your payroll tax system accordingly.

Conducting Business in Multi-States

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Year-end is a good time to review all operations and to ascertain if you are doing business in additional states. No matter where your company is headquartered, there’s a good chance you conduct business across other state borders. How do taxes work in this situation? Learn about multi-state taxes  to ensure that your business is registered with each appropriate secretary of state, and collecting and submitting the proper taxes.

If your business is headquartered in one state, but you sell your products across the border, do you have to pay taxes in the recipients’ state? This answer depends largely on whether you have what is referred to as a “nexus,” meaning an establishment in the recipients’ state. So what is a nexus and what constitutes an establishment?

Any of the following might create a nexus in a given state:

  • A temporary or permanent office
  • A warehouse
  • A storage locker
  • A sales representative based in that state

The rules have a lot of subtleties, however, and each state may have slightly different interpretations of how the rules work, further complicating the issue. Take for example, New Jersey, which does a lot of cross-border business with New York and Pennsylvania. New Jersey says any of the following may create nexus:

  • Selling, leasing, or renting tangible personal property or specified digital products or services
  • Maintaining an office, distribution house, showroom, warehouse, service enterprise (e.g., a restaurant, entertainment center, business center), or other place of business
  • Having employees, independent contractors, agents, or other representatives (including salespersons, consultants, customer representatives, service or repair technicians, instructors, delivery persons, and independent representatives or solicitors acting as agents of the business) working in the state

Of course, regulatory changes and court cases can change this interpretation at any time. Indeed, the New York State Department of Taxation and Finance issues more opinion letters on sales tax issues than on all other state taxes combined. Many states are desperate for additional tax revenues and are very ingenious at identifying out-of-state businesses operating in their jurisdiction.

With 45 states imposing a sales tax, it’s essential you stay in touch with us to ensure that you’re in compliance. Contact one of our tax professionals at Urbach & Avraham, CPAs to review your multi-state tax situation.

Compensation- or Dividend in Disguise?

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When your corporation has a profitable year, do you take more salary or pay yourself a year-end bonus? Since you are pivotal to your company’s success, paying yourself more in the good years only makes sense. Increasing or decreasing your compensation from year to year based on company performance can also help manage your company’s cash flow — and the amount of income taxes it has to pay.

Tax Impact

A corporation may deduct compensation as a business expense if it is reasonable in amount. Distributing profits as salaries and bonuses can help minimize taxable corporate income, although you and other recipients will be taxed individually on the compensation you receive.

You may decide that paying additional compensation is preferable to paying out profits as dividends. Unlike compensation, dividends are not deductible. Result: C-Corporate profits are taxed twice — once at the corporate level and again to the shareholders who receive the dividends.

A Word of Caution

If the amount of compensation paid to you and other shareholder-employees is deemed to be unreasonable, the IRS could challenge your company’s deduction for the expense, reclassifying the “excessive” amounts as nondeductible dividends. This applies to C-Corporations.

To potentially reduce the chances of problems with the IRS, consider these strategies:

  • Divide the profits and pay out a portion as bonuses. Leave enough money in the company to generate a small amount of taxable income.
  • When setting bonuses, avoid using ownership percentages to determine the amounts shareholders will receive, since that method suggests the payment of dividends.
  • Adopt and follow a formal compensation plan for executives that includes bonus payments based on meeting specified financial goals.
  • Earmark a portion of company profits for dividends. Individual shareholders will generally pay federal income tax on qualified dividends at a maximum rate of 20%, which is significantly lower than the maximum rate on compensation and other ordinary income.

What is reasonable compensation? The following factors must be considered :

  • The profession
  • Your specialty within the profession
  • Years of experience
  • Geographic area of business
  • Job responsibilities

Your tax situation, profession and circumstances are unique. Jeff Urbach, CPA and partner at Urbach & Avraham, CPAs is an expert is determining reasonable compensation. Jeff is also a CVA (Certified Valuation Analyst) and an ABV (Accredited in Business Valuations). Contact us for a consultation regarding your situation.