Question

In year 1 (the current year), OCC Corp. made a charitable donation of $200,000 to the Jordan Spieth Family Foundation (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any charitable contributions, before deducting its $20,000 dividends received deduction, and before deducting its $40,000 NOL carryover from last year.

a. What amount of the $200,000 donation is OCC allowed to deduct for tax purposes in year 1?

b. In year 2, OCC did not make any charitable contributions. It reported taxable income of $300,000 before any charitable contribution deductions and before a $15,000 dividends received deduction. What book–tax difference associated with the charitable contributions will OCC report in year 2? Is the difference favorable or unfavorable? Is it permanent or temporary?

c. In year 2, OCC did not make any charitable contributions. It reported taxable income of $300,000 before any charitable contribution deductions and before a $15,000 dividends received deduction. In years 3, 4, and 5, OCC reported taxable losses of $50,000. Finally, in year 6 it reported $1,000,000 in taxable income before any charitable contribution deductions. It did not have any dividends received deduction. OCC did not actually make any charitable donations in year 6. What book–tax difference associated with charitable contributions will OCC report in year 6?

Answer 1

a. OCC taxable income for charitable contribution limitation purposes is $1,460,000 ($1,500,000 - $40,000 NOL carryover).

So, its deductible limit on charitable contributions is $146,000 ($1,460,000 x 10%).

Explanation:-

OCC may deduct up to 10% of taxable income before any charitable contributions, the dividends received deduction, and NOL and capital loss carrybacks. Because net operating loss carryovers are deductible in determining the taxable income limitation.

b.  OCC's taxable income limitation in year 2 is $30,000 ($300,000 x 10%). Although OCC did not make any current year

contributions, it is allowed to deduct (subject to the 10% limitation) its charitable contribution carryover from year 1 in the amount

of $54,000. Because the limitation on the deduction in year 2 is $30,000, it may deduct $30,000 and carry over the remaining

$24,000 to year 3. In year 2, OCC will therefor report a $30,000 favorable, temporary book-tax difference.

c.  OCC would be allowed to deduct its remaining $24,000 charitable contribution carryover because the taxable income is not

limiting. Consequently, it would report a favorable temporary book-tax difference of $24,000. If OCC had not been able to deduct

some of the carryover in year 6, the carryover would have expired unused.