Question

Nora has some questions for you regarding her individual tax return and C-C Bakery. Her business has been doing extremely well, and she has decided to give back to her community. She would like to contribute $70,000 in December of 2016 to the charitable and nonprofit Boys and Girls Club. She would like to know if she should contribute this from her business account or her individual account. She would also like to know if there are any tax advantages or limitations. Her bakery has been profitable, as her taxable income is projected to be around $500,000 on her 2016 tax return. Her adjusted gross income on her individual return will be around $350,000. She has made no further charitable contributions throughout the year. In a short memo, advise how she can take advantage of the deduction for the charitable contributions to her community via her individual return and/or corporate return.

Answer 1

To: Nora

From: (Name of the student)

Subject: Tax advice about charitable contributions

Profit of a sole proprietorship business is added to the other income of the proprietor to calculate the Adjusted Gross Income (AGI). Contributions in charitable funds are allowed as deductions from business income only and not allowed as deductions in case such donations are made by individuals. Thus, it would be important for a proprietor to make such donations from business to deduct the same while calculating the taxable income of such business. In this case also the contribution of $70,000 by Nora should be made from business to reduce the income from business and subsequently the AGI of Nora. This will help Nora to reduce her taxable income and resultant tax liability. As a result of such contribution the net profit from business of Nora would be reduced by $70,000 which will be added to other income of Nora for calculating the AGI of Nora for the tax year. Based on such income the tax liability of Nora shall be determined.