Business leaders utilize budgets for many purposes, including the planned level of charitable and philanthropic support of the community. Considering tax credits available to Michigan taxpayers while preparing the budget may extend the dollars available for other charitable or business use.

Sections 208.38,  208.38(f) and 208.38(c) of the Single Business Tax Act provide for a credit, separated into three categories, for many business taxpayers for contributions made to qualifying organizations. The first charitable entity credit is available for gifts to institutions of higher learning, a public broadcast system not affiliated with an institution of higher learning, a public library or other authorized organization (public contribution credit).  

The second type of charitable entity credit is available for gifts to homeless shelters, food banks and soup kitchens (homeless credit). Organizations that qualify for this credit are charitable entities whose primary purpose is the delivery of food, meals or shelter to indigent persons. Organizations such as churches, schools, veteran posts or other charities may provide food or shelter to indigent persons, but unless this is the organizations’ primary purpose, the contribution will not qualify for the credit.

Finally, contributions to endowed funds of certified community foundations qualify for a separate credit (community foundation credit). An endowment fund is a permanent fund from which it is expected that only the income from the fund will be expended for charitable purposes. The principal will not be expended absent unusual circumstances (such as the exercise of the foundation’s legal power of modification). A community foundation may have a variety of endowed funds such as advised funds, field of interest funds, designated funds, agency endowment funds, unrestricted or operating endowment funds. Assuming each of these types of funds functions as an endowment fund as described above, contributions designated to these funds may qualify for this credit.

Contributions of cash or other property qualify for the credit for the public institution credit and community foundation credit. A contribution qualifying for the homeless credit must be made only in cash.

The credit is a nonrefundable credit of 50 percent of the amount contributed, subject to the limitation of the lesser of 5 percent of the taxpayer’s tax liability for the tax year before claiming any credits allowed by the Single Business Tax Act, or $5,000. Each of the three types of credits is separately tested for this limit. A common misunderstanding is if a gift is made to one of the types of entities, no gift to the other two types of entities would qualify for the credit. While the limit is computed separately for each type of gift, the benefit could equal the sum of each of the computed credits.

To illustrate, let’s assume that Business A has an annual single business tax liability before any credits of $24,000. It makes a qualifying contribution of $2,200 to a qualifying public institution, a $1,000 cash gift to the local food bank, and a $4,000 gift to a certified Michigan community foundation field of interest fund. The total credit allowed on their Michigan single business tax is $2,800 computed as follows: public institution $1,100 (50 percent of gift is lesser amount), homeless $500 (50 percent of gift is lesser amount) and community foundation $1,200 (5 percent of tax is lesser amount).

Generally, owners of closely held businesses have a choice of making contributions personally and claiming similar credits of 50 percent of the gift, subject to a limit of $100 credit on a single return or $200 on a joint return, or making the contribution through their business. For businesses whose Michigan single business tax exceeds $8,000 annually, the limitation provisions illustrated above favor gifts from the business for contributions exceeding $400 for each of the three types of qualifying contributions.

In summary, time spent researching whether the intended gift may qualify for special tax credits on your Michigan single business return may positively impact the net tax cost of the gift. Astute taxpayers who do this research may benefit from credits available and thus preserve funds to support other charitable gifts or to use for other business purposes.

		Paul Roush, CPA is a senior manager with the accounting and consulting firm of Andrews Hooper & Pavlik, specializing in tax matters pertaining to  real estate and closely held businesses.