By Anthony Basile
For tax years beginning in 1998, the opportunity for charitable contribution deductions has increased, due to the amendment to IRC section 170(e)(6) made by the Taxpayer Relief Act of 1997. Congress created an incentive for businesses to invest their computer equipment and software to provide primary and secondary school students and teachers with the resources needed in a technologically advanced future.
Charitable contributions of computer equipment, however, will receive special treatment under the law only for a limited period of time, so careful planning is essential. Typically, the amount of the deduction for property contributed to a charitable organization is the fair market value on the date of contribution. Contributions of inventory, short-term capital gain property, or other ordinary income property is generally limited to the taxpayer's basis in the property. The deduction for property contributed to an organization and put to use in a way unrelated to the organization's tax-exempt purpose is also limited to the adjusted basis of the property.
This treatment does not apply to certain corporate contributions of inventory and other property for the care of the ill, the needy, or infants and for certain contributions of scientific equipment constructed by the taxpayer to be used in domestic physical or biological research. In these cases, an augmented deduction is provided for under IRC sections 170(e)(3) and 170(e)(4). Under this special rule, the deduction is the basis of the property plus one-half of the ordinary income that would have been realized if the property were sold. The deduction is limited to twice the basis in the property using this calculation.
Qualified contributions are limited to gifts made no later than two years after the date the taxpayer acquired or substantially completed the construction of the donated property. Property is considered constructed by the taxpayer only if the cost of the parts used in the construction of the property (other than parts manufactured by the taxpayer or a related person) do not exceed 50% of the taxpayer's basis.
The original use of the property must be by the donor or donee. The donee may not transfer the donated property for money, services, or other property, except for shipping, transfer, and installation costs.
The 1997 Act provides that for years beginning after 1997 and before 2000, the list of contributions that qualify for augmented charitable deductions has been expanded to include certain contributions of computer technology to primary and secondary schools. The new rules are only applicable to certain C corporations. S corporations, personal holding companies, and service organizations cannot be eligible donors.
The qualifying gifts include donations of computer equipment, peripherals, software, and fiberoptic cable to be used in the United States for educational purposes in any grade (K12). The donated property must fit productively into the educational plans of the school. Eligible donees, for purposes of this deduction are--
* an educational organization that maintains regular faculty and curriculum and has a regularly enrolled body of pupils in attendance at the place where its educational activities are regularly conducted;
* a section 501(c)(3) entity that is organized primarily for the purpose of supporting elementary and secondary education; and
* a private foundation that, within 30 days, contributes the property to an eligible donee as described above and notifies the donor of the property to the foundation.
Definition Of Computer Technology And Equipment
Computer technology and equipment encompassess computer software as defined in IRC section 197(e)(3)(B) (i.e., any program designed to cause a computer to perform a desired function, but usually not including databases). Computer or peripheral equipment is defined in IRC section 168(i)(2)(B) as any computer or auxiliary machine designed to be placed under the control of the central processing unit, but not typewriters, calculators, or copiers, nor any equipment used primarily for the users' amusement or entertainment; and fiber optic cable related to computer use [IRC section170(e)(6)(E)(i)].
Example. A C corporation, Emjac Inc., donates on August 11, 1998 computer equipment that it had purchased new on January 18, 1997, to a public elementary school in Garden City, N.Y. At the time it was contributed, the equipment's fair market value was $80,000 and its adjusted basis was $25,000. The contribution of eligible property is calculated as follows: To the donor's basis of $25,000, add one-half of the gain that would have been realized if the property had been sold at its fair market value, $27,500 ($80,000 -$25,000 ÷ 2), for a total of $52,500 ($25,000 + $27,500). Since this amount exceeds twice the donor's basis in the contributed property, the charitable deduction is limited to $50,000 ($25,000 x 2).
As a practical matter, however, most computer equipment devalues in a two-year period of time. And the usefulness of the augmented calculation may be limited in situations involving depreciation recapture. *
Anthony Basile, CPA, is an instructor at Hofstra University in Hempstead, N.Y., and a doctoral candidate in Business Education at New York University.
TAX CREDITS THAT ARE NOT CHILD'S PLAY
By Richard Greenfield, CPA, Reminick, Aarons & Company, LLP
Both the 1996 and 1997 tax acts created new tax credits designed to provide tax relief for families with children. Due to their complexity, these tax credits are anything but child's play.
The 1996 tax act established a nonrefundable credit for qualified adoption expenses for eligible children, beginning in tax years after 1996. The maximum amount of the credit, over all tax years, is $5,000 per child. The maximum credit is increased to $6,000 if the child has special needs (except for foreign adoptions). The credit phases out for taxpayers with modified adjusted gross income between $75,000 and $115,000.
Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are directly related to and principally for the legal adoption of an eligible child by the taxpayer. The expenses cannot be incurred in violation of state or Federal law, nor in carrying out any surrogate parenting arrangement, nor can the expenses be in connection with the adoption by an individual of a child of the taxpayer's spouse. In addition, the expense cannot be reimbursed under an employer program.
The 1997 tax act clarified that if the qualified adoption expenses are paid during a tax year prior to the tax year in which the adoption is finalized, the credit is allowed during the year the adoption is finalized. If the adoption expenses are paid during or after the tax year in which the adoption is finalized, the credit is to be claimed for the tax year in which the expense is incurred or paid. Any expense paid or incurred before the tax year in which a foreign adoption becomes final is treated as paid or incurred in the year that the adoption becomes final.
An eligible child is a person under the age of 18 at the time of the adoption or physically or mentally unable to take care of him or herself. A child with special needs is a child who the state has determined cannot or should not be returned to the parents' home, and who possesses a specific factor or condition which would reasonably require that such a child cannot be placed with adoptive parents unless assistance is provided. Such conditions include the child's medical condition; physical, mental, or emotional handicap; ethnicity; age; or membership in a minority or sibling group. A child with special needs must be a citizen or resident of the United States.
A five-year carryover is available for credits not allowed during a tax year due to the limitation based on tax liability.
In order to claim the adoption credit, married taxpayers must file a joint Federal income tax return (unless they are separated or living apart for the last six months of the tax year), the eligible child must have lived in the home of the taxpayer claiming the credit for more than half of the tax year, and the taxpayer must have provided more than half the cost of maintaining the home. Single individuals, as well as taxpayers filing as a head of household or as a qualified widow with a dependent child, may also claim the credit. The taxpayer must provide the eligible child's name, age, and taxpayer identification number. Form 8839, Qualified Adoption Expenses, is used to provide the required information and to calculate the credit.
The adoption credit is due to expire for expenses paid or incurred after December 31, 2001. However, the credit will continue to be available after that date for children with special needs.
In addition to the adoption credit, the 1996 Tax Act established an exclusion from gross income of amounts paid or expenses incurred by an employer for an employee's qualified adoption expenses pursuant to an adoption assistance program for tax years beginning after 1996. The maximum exclusion per child is $5,000 (or $6,000 if the child has special needs as defined earlier). The exclusion is phased out under the same rules as the adoption credit. Qualified adoption expenses are also the same as for the adoption credit.
An adoption assistance program is a separate written plan of an employer providing adoption assistance exclusively for the benefit of its employees. The plan must meet requirements like those applicable to educational assistance programs. Form 8839 must be used to calculate the amount of employer-provided adoption benefits that can be excluded from gross income. The exclusion is due to expire for amounts paid or expenses incurred after December 31, 2001. There is no exception for special needs adoptions.
Child Credit
The 1997 tax act established a child tax credit of $400 per child for 1998 and $500 per child for 1999 and later. The child must be under age 17 as of the end of the tax year to qualify. In addition, the relationship to the taxpayer must be that of child, grandchild, stepchild, or eligible foster child for whom the taxpayer can claim a dependency exemption, and the child must be a United States citizen or resident.
The credit phases out by $50 for each $1,000 that the taxpayer's modified adjusted gross income exceeds $110,000 for married taxpayers filing jointly, $75,000 for single taxpayers or heads of household, and $55,000 for married taxpayers filing separately. The child tax credit is a nonrefundable credit. However, a portion of the credit may be treated as a refundable credit. The refundable credit that is part of the earned income credit is called the supplemental child credit.
If the taxpayer has two or less qualifying children, the refundable, or "supplemental" child credit is equal to the excess of--
* $400 ($500 for 1999 and after) multiplied by the number of qualifying children up to the excess of the taxpayer's income tax liability (net of applicable credits other than the earned income credit) over the taxpayer's tentative minimum tax liability exclusive of the alternative minimum tax foreign tax credit, over
* the taxpayer's regular income tax liability (net of applicable credits other than the earned income credit) plus the employee's share of FICA and one half of the taxpayer's self-employment tax, if any, less the earned income credit.
The maximum amount of the child credit for a taxpayer with three or more children is equal to the greater of--
1. the excess of the taxpayer's regular tax liability (net of applicable credits except for the earned income credit) over the taxpayer's tentative minimum tax exclusive of the alternative minimum tax foreign tax credit, or
2. the excess of the taxpayer's regular tax (net of applicable credits except for the earned income credit), plus the employee's share of FICA and one-half the taxpayer's self-employment tax liability, if any, less the amount of the earned income credit.
The portion of the credit calculated in 2 that exceeds the amount calculated in 1 is the refundable credit. The portion of the credit calculated under 1 that exceeds the credit calculated under 2 is the supplemental credit.
The purpose of the calculation is to ensure that a taxpayer with three or more children is allowed a refundable credit to the extent that the social security tax exceeds the refunded earned income credit. The amount of any supplemental child credit claimed as part of the earned income credit reduces the amount of the otherwise allowable child credit. The credit is calculated using Form 8812 and the Child Tax Credit Worksheet in the Form 1040 instruction package.
The Tax and Trade Relief Extension Act of 1998 provides for a waiver of the minimum tax rules with regard to the utilization of nonrefundable personal credits for 1998. For 1998, therefore, these credits are not limited to the extent that the regular income tax liability exceeds the tentative minumum tax liability. As a result of this waiver, the additional child credit for 1998 is not reduced by the amount of the alternative minimum tax. In addition, the full benefit of the adoption credit should be available for 1998. *
Editor:
Edwin B. Morris, CPA
Rosenberg, Neuwirth & Kuchner
Contributing Editors:
Ira H. Inemer, CPA
Richard M. Barth, CPA
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