Question

In year 1 (the current year), LAA Inc. made a charitable donation of $162,750 to the American Red Cross (a qualifying charity). For the year, LAA reported taxable income of $583,000, which included a $162,750 charitable contribution deduction (before limitation), a $52,750 dividends received deduction, and a $19,900 net operating loss carryover from year 0.

Answer 1

The charitable contribution deduction for the year is limited to 10% of taxable income before any charitable contribution, before the dividends received deduction, and the domestic production activities deduction. But, it is determined after deducting NOL carryovers (but not NOL carrybacks). Consequently, LAA's modified taxable income is $818400 ($583000 + $162750 + $52750 + $19900). LAA's charitable contribution deduction is limited to $81840 ($818400× 10%). The remaining $80190 ($162750 donation minus $81840 deductible amount) is carried over for up to five years.