A client, a C corporation, has current year taxable income of $1,200,000 before considering a charitable contribution of $150,000. The corporation also has a dividends received deduction (DRD) of $50,000. What is the maximum charitable contribution deduction the corporation can take in the current year?
- A$125,000
- B$120,000
- C$175,000
- D$150,000
Show answer & explanationAnswer & explanation
Correct answer: A. $125,000
A C corporation's charitable contribution deduction is limited to 10% of its taxable income before considering the charitable contribution, the dividends received deduction, capital loss carrybacks, and domestic production activities deduction. Taxable Income before Charitable Contribution = $1,200,000. To calculate the limitation, we add back the DRD: $1,200,000 + $50,000 = $1,250,000. Maximum Charitable Contribution = $1,250,000 * 10% = $125,000. The corporation can only deduct $125,000, and the remaining $25,000 ($150,000 - $125,000) can be carried forward for 5 years.
Why the other options are wrong
- B. Incorrect. This would be 10% of $1,200,000, without adjusting for the DRD.
- C. Incorrect. This calculation is not based on the correct limitation rules.
- D. Incorrect. The full $150,000 cannot be deducted due to the 10% limitation.
C Corp Charitable Contribution Limit
A C corporation's deduction for charitable contributions is limited to 10% of its taxable income, calculated before deducting the charitable contribution itself, the dividends received deduction, any net operating loss carryback, and any capital loss carryback.
- Limit is 10% of adjusted taxable income.
- Adjusted taxable income excludes charitable contributions, DRD, NOL carrybacks, capital loss carrybacks.
- Excess contributions can be carried forward for 5 years.
- Contributions must be to qualified organizations.
Memory trick: Charity's 10% 'Cap' is on 'Taxable Income Plus DRD'.