Charitable giving is a cornerstone of financial planning for many business owners, and the tax code provides substantial incentives to encourage it. But the rules governing charitable deductions are complex, and the strategies available to high-income taxpayers have expanded considerably with the proliferation of donor advised funds and the planning opportunities created by the current elevated income tax environment. Getting the structure right can mean the difference between a modest tax benefit and a transformative one.

The Charitable Deduction Framework

Under Section 170 of the Internal Revenue Code, individuals who itemize deductions may deduct contributions to qualified charitable organizations, subject to a series of percentage limitations based on the type of property donated, the type of charity, and the donor's adjusted gross income. Cash contributions to public charities are generally deductible up to 60% of AGI. Contributions of long-term capital gain property to public charities are deductible up to 30% of AGI. Contributions to private foundations are subject to lower limits—generally 30% for cash and 20% for appreciated property.^[1]

Excess contributions that exceed the annual percentage limitations may be carried forward for up to five years. This carryforward provision is particularly important for business owners who make large one-time contributions or who experience fluctuating income from year to year.

Donor Advised Funds: The Workhorse Strategy

Donor advised funds (DAFs) have become the most popular charitable giving vehicle in the United States, and for good reason. A DAF is a separately identified fund maintained by a sponsoring organization (typically a community foundation or a financial institution's charitable arm). The donor makes an irrevocable contribution to the fund, receives an immediate charitable deduction, and then recommends grants from the fund to specific charities over time.^[2]

The key advantage of a DAF is the separation of the tax deduction from the actual charitable distribution. This enables several powerful planning strategies. The "bunching" strategy involves contributing several years' worth of charitable giving into a DAF in a single year, claiming a large itemized deduction in that year, and then taking the standard deduction in subsequent years while recommending grants from the DAF. This approach is particularly valuable under the TCJA's elevated standard deduction, which has caused many taxpayers to alternate between itemizing and claiming the standard deduction.

Contributing Appreciated Property

One of the most powerful charitable giving strategies is contributing long-term appreciated property rather than cash. When a donor contributes publicly traded stock that has been held for more than one year, the donor receives a deduction for the full fair market value of the stock without recognizing the capital gain. This effectively provides a double benefit—the charitable deduction plus the avoidance of capital gains tax.^[3]

This strategy works equally well with DAFs. Business owners who hold appreciated publicly traded stock can contribute shares to a DAF, receive the full fair market value deduction, and then recommend grants to their preferred charities from the DAF. The DAF sponsor sells the stock tax-free and adds the proceeds to the donor's advisory account.

Qualified Charitable Distributions

For business owners over age 70½ who have individual retirement accounts, the qualified charitable distribution (QCD) provides a unique benefit. A QCD allows the IRA owner to transfer up to $105,000 per year (adjusted for inflation) directly from the IRA to a qualified charity. The distribution satisfies the required minimum distribution obligation but is excluded from gross income—effectively providing a deduction even for taxpayers who do not itemize.^[4]

Charitable Remainder Trusts

For larger charitable gifts, particularly those involving appreciated assets from a business sale, a charitable remainder trust (CRT) can provide both income and tax benefits. The donor transfers appreciated property to the CRT, which sells the property tax-free and invests the proceeds. The trust pays the donor (or other named beneficiaries) an income stream for a term of years or for life, with the remainder passing to one or more charities. The donor receives a partial charitable deduction at the time of the contribution based on the present value of the charitable remainder interest.^[5]

Business owners considering any of these strategies should consult with their tax advisor well before year-end to ensure proper documentation and compliance with the substantiation requirements that apply to all charitable contributions.