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Even a Scrooge Loves a Charity Tax Write-Off
By Donating Stock or Cash to a Favorite Cause, Investment Clubs Also Enrich Their Members
’Tis the season for giving — does your investment club have a philanthropic spirit? Many investment clubs make a point of donating cash or securities each year to worthy charitable organizations. Besides helping to do good, these clubs are gaining tax deductions and other potential benefits for their members. This year, why doesn’t your club consider helping out a favorite nonprofit organization with a donation?
2012 is the 200th anniversary of the birth of English author Charles Dickens. As the year comes to a close, it’s appropriate to pay homage to one of Dickens’ greatest works, A Christmas Carol. The book’s main characters, including Tiny Tim, Bob Cratchit and the spectral Jacob Marley, are familiar to most, but few literary creations are as vivid as Ebenezer Scrooge, the hard-hearted miser whose transformation serves as the book’s satisfying dénouement. Translated into hundreds of languages and adapted frequently for the stage, television and film (I’m personally partial to Bill Murray’s “Scrooged”), A Christmas Carol is a truly timeless book.
Just as Scrooge realizes that more pleasure can be gained from sharing with his fellow humankind than he could ever earn from selfish misanthropy, many individuals take a few extra moments at this time of year to share with others less fortunate. Investment clubs can get into the act as well by making a group contribution from their club to their favorite charities. The amounts need not be large to have an impact.
ICLUBcentral’s Club Accounting 3 software and the myICLUB.com investment club platform both support charitable donations of either cash or securities, making it easy to handle the record-keeping involved in gift-giving.
Before I review how these transactions work, an understanding of Internal Revenue Service rules regarding charitable contributions is in order.
Since most investment clubs are formed as general partnerships or other pass-through tax entities, the tax advantages of a club’s charitable giving are passed along to members at year-end, as are the club’s other income and expense items. To qualify for a tax deduction, gifts must be made to qualified organizations (see IRS Publication 526, “Charitable Contributions,” for rules on what constitutes a qualified organization). Written records must be maintained documenting the contribution and most organizations provide receipts, though they’re only required to provide receipts for gifts equaling $250 or more. If you receive goods or services because of your contribution, only the amount exceeding the fair market value of the benefit received is considered deductible. If a partnership donates property worth more than $500 to a charity, the partnership must file a Form 8283 with its Form 1065.
Making Gifts of Stocks and Other Securities
There’s another important tax advantage that can come with making charitable gifts of stocks or other securities. Most charitable organizations are happy to receive gifts of securities; contact the organization and your brokerage firm to determine the procedures for transferring shares.
If the securities to be donated have been owned for longer than 12 months and a day, and those securities have appreciated in value, the amount that can be claimed as a charitable gift for federal income tax purposes is the securities’ fair market value on the date of the gift (determined by averaging the open and closing prices on the gift date).
But most importantly, the capital gains tax on the stock's appreciation (the difference between its original cost basis and its present market value) is completely avoided! If your club wants to make a charitable contribution and you own securities with a lot of unrealized gains, considering a gift of some or all of those shares provides a double tax benefit — avoiding capital gains tax and receiving a tax deduction for the gift.
For securities that have been held for less than 12 months, the amount that can be claimed as a charitable gift is the club’s original cost basis in the securities. Obviously, if those stocks have gone up in value, it wouldn’t make much sense to give those shares. For securities that have gone down in value, it’s best to sell those shares — thus capturing the capital loss — and give the proceeds as a cash gift. Donating depreciated shares means losing the capital loss, so this isn’t generally a recommended approach.
Receiving Tax Deductions for Charitable Giving
To deduct their share of the club’s charitable contribution, individual members must file Form 1040 and itemize deductions on Schedule A of their personal tax returns. There are limits based on an individual’s adjusted gross income (AGI) of the amount that can be deducted in a single year for cash, short-term investments and long-term investments, though excess contributions can be carried forward to a certain number of future tax years. Individuals should consult their tax advisers for more on their particular situations.
Recording Charitable Contributions
At the myICLUB.com website, club treasurers can record a charitable gift in the Accounting > Cash Accounts section (even if securities are to be donated). The date, amount and account used are recorded, then the distribution method must be selected.
There are two ways to account for a charitable gift: by the ownership share of members or by member. The first sets the amount of the contribution that’s allocated at year-end to each member by ownership percentage in the club; a member who owns 15 percent of the investment club would receive 15 percent of the charitable gift. The second distributes the contribution equally among all members, so all partners receive the same amount at year-end as their reportable portion of the gift.
For gifts of stock, click the “Select Stocks” button, then select the security and number of shares. The site then asks for the specific tax lots to be transferred. By default, the FIFO (first in, first out) rule applies, so the oldest shares are transferred first. But you may wish to select shares with a lower cost basis to maximize the tax advantages. (Be aware of rules governing the selection of specific lots for sales and transfers if you’re thinking of using this method.)
For transfers of securities, you’ll need to create a custom securities valuation on the date of the gift that includes the fair market value of the shares (calculated as described above) to properly reflect the amount of the gift in the club’s books.
At year-end, the charitable contribution will appear on the Allocation of Income and Expenses report, as well as on each member’s 2011 Schedule K-1 in Box 13. The amount also appears on Line 13A of the 2011 Form 1065.
For smart investment clubs, the tax advantages of charitable giving and the satisfaction of doing good can combine to make all members a little jollier without needing to spike the eggnog at the club’s holiday party. I wish all clubs and their members
continued prosperity and happiness in 2013!
Douglas is ICLUBcentral's product manager, helping develop the company's programs including Toolkit 6, myICLUB.com, and the Investor Advisory Service. He is also the author of several investing books, including The Pocket Idiot's Guide to Direct Stock Investing, The Complete Idiot's Guide to Online Investing, The Armchair Millionaire, and Investment Clubs for Dummies.