Hartford Business Journal

www.HartfordBusiness.com • February 12, 2018 • Hartford Business Journal 9 FOCUS Tax reform could have 'chilling effect' on charitable donations By Patricia Daddona pdaddona@HartfordBusiness.com C haritable giving could take a hit under the federal tax law, advisers say. Now that the standard deduction has been doubled — to $12,000 for a single filer and $24,000 for married couples filing jointly — fewer people will likely itemize their deductions, including charitable dona- tions, which could negatively impact giving, tax advisers say. Or, wealthy individual donors who typically itemize and write-off large deductions may choose to bunch them together in a single year just to reach the $24,000 threshold as a way to circumvent the limit. However, that could prevent donors from giving the next year, advisers said. Carlton S. Chen, an attorney at Kurien Ouellette in West Hartford and Robert Karn, a principal with Farmington accounting firm Karn Couzens, said the changes in claiming deductions on charitable gifts require careful planning. "If you cannot deduct charitable con- tributions because you don't reach the $24,000 threshold, you might decide not to donate or not to donate as much as you have in the past," said Chen. "Well-to-do people make nice chari- table contributions," said Karn. "If they lose their deductions it has to have a chilling effect." That doesn't mean charitable contributions are dead, said Tim Barry, a partner with West Hart- ford accounting firm BlumShapiro. "The main reason why people give is to help an organization out," he said, "so some people who are going to take the standard deduction will still con- tribute to the charity and would want to give each year for the benefit of the charity's cash flow." posed on wages in excess of $1 million for any covered employee of a nonprof- it entity. This tax, paid by the organi- zation, is applicable to compensation in excess of $1 million for employees of a tax-exempt organization who are among the five highest-paid employ- ees for the taxable year. A special ex- clusion applies to compensation paid to licensed medical professionals. The excise tax applies to any "excess parachute payments," which is com- pensation contingent upon termina- tion of employment where the aggre- gate present value of the payments exceeds three times the employee's average annual compensation. This change is intended to bring nonprofit salary taxation in line with tax policy regulating for-profit corpo- rations. Repeal of advance refunding bonds Interest on advance refunding bonds (i.e. refunding bonds issued more than 90 days before the redemp- tion of the refunded bonds) will now be taxable. Interest on current refund- ing bonds continues to be tax-exempt. The provision is effective for advance refunding bonds issued after 2017. Key observations The provisions noted above are effective for taxable years beginning after Dec. 31, 2017. With many variables still unknown regarding how multiple lines of unre- lated business activities will be treated, consideration might be given to housing profitable and unprofitable activities in a single taxable corporate subsidiary. This would enable expenses and income to once again offset, afford- ing the benefit of the lower 21 percent corporate income tax rate. Nonprofits should consult their tax profession- als to evaluate the applicability of this and other potential strategies to their individual circumstances. The adjusted gross income limita- tion increased to 60 percent (from 50 percent) for cash contributions made to public charities by individuals. Tax-ex- empt organizations should promote this benefit with donors to increase funding. The provision does retain the five-year carryover rule to the extent the contri- bution amount exceeds 60 percent of the donor's adjusted gross income. Boards and committees of tax- exempt organizations need to evalu- ate conditions for both current and deferred compensation that might result in exceeding the new compen- sation threshold for the 21 percent excise tax. Marla Esan is the director of tax and business services at accounting firm Marcum LLP, which has a Hartford office. The "biggest buzz" is coming from the 20 percent deduction for pass- through companies, which is compli- cated, said Andrew Lattimer, a Blum- Shapiro tax partner in West Hartford. Pass-through taxation applies to sole proprietorships, partnerships and S-corporations — entities in which the owners, as shareholders, partners or LLC members, pay the tax, Lattimer said. Pass-through companies do not include C-corporations, where there's double taxation because the tax is paid both at the corporate and ownership level, Lattimer said. Service companies like accounting and law firms won't get the deduc- tion, but manufacturers, construc- tion, engineering and architecture firms will, he said. Also, to qualify for the full de- duction, taxable income must be below $157,500 for a single filer and $315,000 for joint filers. "I've had quite a few business own- ers tell me that they thought they were going to pay more until I ran the numbers for them, and they saw they'll pay less and were pleasantly surprised," Lattimer said. There is some confusion, added Mc- Grath of Marcum, regarding how to determine what constitutes so-called "qualified income," the amount upon which the deduction is based. SALT impact The 20-percent deduction on pass- through companies is one reason Harry French, board chairman for Fairfield-based Henry C. Reid & Sons Jewelers, is considering restructur- ing from a C-corp to an LLC. French said the restructuring is also a reaction to the $10,000 state and local tax deduction cap, which many of his wealthy jewelry clients are complaining about. "I've got customers with literally dozens of homes on the water where they're paying $40,000, $50,000 or more in taxes that they won't be able to write off anymore," French said. "That affects my customers. And if it affects my customers, it will also affect me." Local tax advisers said the $10,000 SALT deduction limit could drive C- suite executives out of state, if not for the full year then long enough to be considered out-of-state residents. "I think [the SALT provision] is go- ing to accelerate folks who can afford it, leaving the state for six months and a day," said Robert Karn, a princi- pal with Farmington accounting firm Karn Couzens. Malloy said 41 percent of Connecti- cut taxpayers use SALT deductions (averaging $18,939.72). He recently proposed a potential SALT cap work- around, but it's not clear if it will pass legal muster. His proposal would allow cities and towns to create charitable organi- zations that provide government services. Taxpayers could make con- tributions to the charities, avoiding local tax payments, and then claim a charitable deduction, which isn't capped. UTC's perspective Meantime, large companies like UTC are embracing the corporate tax rate reduction and the repatria- tion of earnings to the U.S. Elizabeth Coffin, UTC's vice presi- dent for global tax policy, said the conglomerate, whose subsidiaries include Pratt & Whitney and Otis Elevator, had spent years advocating for a more competitive tax code. Though still evaluating the impact of the new law, UTC is eagerly tuning in to upcoming "interpretive guid- ance" from federal agencies, she said. UTC Chairman and CEO Gregory Hayes told CNBC recently that the company plans to repatriate this year $3 billion in overseas cash, a much higher amount than usual, thanks to the tax law. Some of that money will help pay down debt from the com- pany's pending $23 billion purchase of Rockwell Collins. Carlton S. Chen (right) talks to Jeffrey A. Brine, both attorneys at Kurien Ouellette in West Hartford, as they listen to experts at a January tax forum in Cromwell. PHOTO | CONTRIBUTED

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