Julieta Simms is the president and sole shareholder of Simms Corporation (a cash method, calendar year C corporation). Julieta plans for the corporation to make a charitable contribution to the University of Washington, a qualified public charity. She will have the corporation donate Jaybird Corporation stock, held for five years, with a basis of $11,000 and a fair market value of $25,000. Julieta projects a $310,000 net profit for Simms Corporation in 2020 and a $100,000 net profit in 2021. Julieta calls you on December 10, 2020, and asks whether she should make the contribution in 2020 or 2021. Complete the letter advising Julieta about the timing of the contribution.
For the present value computations, assume a 5% discount rate and the following present value factors: for 2021, 0.9524; for 2022, 0.9070; for 2023, 0.8638.
Maloney, Young, Nellen, & Persellin, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 17, 2020
Ms. Julieta Simms, President
Simms Corporation
1121 Madison Street
Seattle, WA 98121
Dear Ms. Simms:
On December 10 you asked me to advise you on the timing of a contribution by Simms Corporation to the University of Washington. My calculations show that the corporation will maximize its tax savings by making the contribution in.
If the corporation makes the contribution in 2020, it can deduct $as a charitable contribution, which will savein Federal income tax. However, if the corporation makes the contribution in 2021, the percentage limitations applicable to corporations will limit the 2021 deduction to $. The corporation will savein taxes as a result of this deduction. The corporation may carry the remaining amount forward for up toyears or until exhausted. If the corporation continues at the 2021 profit level for subsequent years, it would be able to deduct $% of the carryover in 2022 and the remaining $of the carryover in 2023. The deduction of the $carryover amount would result in an additional tax savings of $, for a total tax savings of $. Although this analysis indicates that the corporation will save $regardless of the year of the gift, the present value of the deductions must also be considered. If the contribution is made in 2020, all the savings will occur in 2020, resulting In a present value of $for the deduction. If the corporation makes the contribution in 2020, its tax savings will be split among several years. Based on the earlier profit assumptions and a 5% discount rate, the present value of a contribution in 2021 would be. Thus, a contribution in 2020 would result in a present value tax savings of. My advice is that the corporation should make the contributionimmediately so that ownership of the stock can be transferred by.
Sincerely,
Alicia Gomez, CPA