UBIT and S-Corp Stock - American Endowment Foundation

Report
Creative Charitable Strategies for
Clients with Sub-Chapter S Shares
Bryan Clontz, CFP®
President, Charitable Solutions, LLC
[email protected]
404-375-5496
Agenda
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UBIT Definition and Overview
UBIT Exceptions
UBIT and S-Corp Stock: A Summary
UBIT Solution: Dechomai Asset Trust
Trust Rates vs. Corporate Rates
UBIT Case Studies
UBIT Resources/Articles
UBIT Definition and Overview
•Code Section 512 defines UBIT as income derived from an
unrelated trade or business – UBIT has existed for nearly 60
years
•Tax is paid at either corporate or trust rates
•Charities must file 990-T and publicly disclose UBIT section
•IRS may audit UBIT compliance/accuracy
•Practical applications and compliance of UBIT are particularly
complex
•UBIT typically arise with S-Corp stock, real estate with debt or
real estate with active service income
•Some charities automatically decline UBIT gifts
UBIT Exceptions
Passive Income – rents, interest, gains, dividends, royalties, etc.
1. Exception – debt financed income
Exception – mortgage for 5 years and owned for 5
years “old and cold”
2. Exception – S corporation income
Charitable Remainder Trusts are not exempt from UBIT,
charitable gift annuity contracts are exempt under acquisition
indebtedness rules IRC 514(c)5 but the funding asset is not
exempt
UBIT and S-Corp Stock: A Summary
•There are more than 3 million S-corporations - about the
same as C-corporations and LLCs combined – with
nearly 6 million shareholders
•In 1998, Congress allowed charities to be qualified
shareholders of S-corporations but not CRTs
•Charities would have to pay UBIT on passive income as
well as any pre- and post-contribution gain
•Donor receives a fair market value deduction (less any
ordinary income reduction) on stock
Taxation – Trust vs. Corporate Rates
Trust Rates (basically the same as individual rates)
•15-35% with the top bracket hit at $10,450
•Capital gains are taxed at 15%
Corporate Rates
•15-39% but are constructed to average 34-35%
•Capital gains are income
•First bracket at 15% is up to $50K, last bracket is 35%
over $18.33M in taxable income
UBIT Solution:
Dechomai Asset Trust Donation Flow
Step 1– California Donor
Contributes S-Corp Stock to
Dechomai Asset Trust,
A Nevada Public Charity
Step 2 – Dechomai Asset Trust
Sells Shares
Step 3 –Dechomai Asset Trust
Grants Net Proceeds to DAF
at American Endowment
Foundation (AEF)
Deduction: $1M of S-corp stock
with $200K adjusted basis
UBIT at trust rates ($800K @
15%) = $120K in tax
Trust receives a 50% of AGI deduction to
reduce tax to $60K plus $25,000 charitable
fee or $85K net with $915K to charity; If
donor sold asset, gift/deduction would
have been $800K (25% tax federal and
state)
Case Study
Investment Advisor Selling to Jr. Partner
Donor Contributes
S-Corp to Trust-Form
Public Charity in
Nevada (Income
Tax-Free State)
Public Charitable Trust
With a Donor Advised Fund
Sells to New Partner/15% Gains
Tax Reduced by 50%
for Deduction
Donor Receives a 100% FMV Deduction.
Donor’s DAF at AEF Receives Net 93%
of Gift as Grant
Vs. Sale and Gift of Proceeds
Netting 77% to DAF at AEF.
Sells 80 shares
Buyer
Cash
Joe Smith
Donates 20
shares
Grant
recommendations
Cash
Sells 20
shares
Income Tax
Deduction
Cash
Smith DAF
with AEF
UBIT
Deduction
Grants
Charity A
Charity B
Charity C
Dechomai
Asset Trust
4 Scenario Summary
Scenarios
1
2
Client Gives
Client Sells
Shares to DAT,
Shares,
Then DAT Grants
Then Gives
Net Proceeds to
Proceeds to AEF
AEF
3
4
Client Gives
Directly to
a Corporate
Form Public
Charity
Client Gives
to a Private
Foundation
Total Donor Tax Savings
Less Taxes Paid
600,000
2,000,000
2,000,000
0
Total Amount Left
for Charitable Giving
4,000,000
4,475,000
3,425,000
3,425,000
Assumptions:
S-Corp Shares FMV
Cost Basis
Federal Tax (Ordinary Income)
Federal Tax Rate (Capital gains)
State Income Tax
$5,000,000
-035%
15%
5%
UBIT Resources and Articles
•American Endowment Foundation Tools: Flow Chart and
Worksheet
•The Tax Law of Unrelated Business for Nonprofit
Organizations by Bruce Hopkins, John Wiley & Sons (2005).
•“Tax Savings Opportunities for Charities Owning Subchapter S
Stock,” by Laura Peebles – Planned Giving Design Center
•“UBTI in Charitable Planning” – 2008 ACGA Conference by
David Wheeler Newman
•“Gifts from Subchapter S Corporations and Their
Shareholders,” by Chris Hoyt and Pam Segars – 2006 NCPG
Conference

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