Question

X Company realizes the importance of being a good corporate citizen and makes generous contributions to worldwide charitable organizations. For the current year, X Company wants to contribute $1,500,000 to various charities. Based on prior year's tax laws, if JIM's taxable income before charitable contributions is $11,500,000 in the current year.

Calculate the charitable contribution allowance for the current year.

Provide a recommendation to X Company management regarding the tax implications of this contribution.

Answer 1

As per the IRS regulations, a corporation can deduct upto 10% of the AGI for qualified charitable deductions. Any amount donated in excess of 10% of the AGI shall not be allowed as deduction.

In the given case,

Income of the corporation before contribution (AGI) = $11,500,000

Maximum eligible deduction for charitable contributions = $11,500,000 * 10% = $1,150,000

Amount that the corporation intends to contribute = $1,500,000

Recommendation to the corporation -

Since, the eligible deduction for charitable contributions is $1,150,000

The corporation should contribute $1,150,000 instead of $1,500,000