Promoting Philanthropy: the Role of Tax Benefits

09. April, 2003


Catherine Shea

Promoting Philanthropy: the Role of Tax Benefits

Tax Incentives for Donors

  • Tax deductions
  • Tax credits
  • Tax designation schemes (1% Laws)

Tax Deductions

  • Deductions reduce the amount of income subject to tax (the tax base)
  • Deductions are the most common form of benefit granted.

Tax Credits

  • Credits reduce the amount of tax owed
  • Regional Examples:

– Hungary – individuals receive a tax credit of 30% of a donation of up to 50,000 HUF for public benefit organizations and 100,000 HUF for prominently public benefit organization;
– Latvia — 85% of a contribution can be claimed as a tax credit, but only up to 20% of the wholly assessed tax liability.

Common Features of Tax Deduction or Tax Credit Rules

  • Gift must be to foundation, association, or other not-for-profit organization
  • Gift must be to Public Benefit Organization
  • Generally, tax benefit are available to both business and individuals who give
  • Percentage limit imposed on tax benefit for gift
  • Monetary gifts and gifts of property allowed

Incentives for Philanthropy – the US Case

  • US Tax Code allows deductions to both individuals and corporations
  • Deductions available for in-kind gifts as well as gifts of money
  • Recipient must be a organized and operated exclusively for one of these purposes: Religious, Charitable, Scientific, Literary, Educational, Prevention of cruelty to children or animals, or to foster national or international amateur sports competition.
  • Individual donations
    – Are deductible only for those who itemize deductions (generally, middle income taxpayers and above)
    – Are deductible up to 50% of income
  • Businesses
    – Donations are deductible up to 10% of taxable income

Incentives for Philanthropy – England and Wales

  • Donation must be to a registered charity
    – Charity has registered with the Charity Commission
    – Charity must pursue exclusively purposes that are charitable; these are relief of the poor, handicapped, or aged; the advancement of religion; the advancement of education; or other charitable purposes that benefit the community.
  • Tax relief is available for both individual and business donors
  • There is no ceiling on the amount of the donation subject to tax relief
  • Individual Donations
  • – Tax relief for gifts made by Payroll Giving:
    – Payroll giving — Employee authorizes employer to deduct regular charitable donations from pay; employer then pays these donations to an agency which distributes the money to the charity or charities of employee’s choice.
    – Deductions are pre-tax, such that tax relief is included in the donation at the top rate.
    – Through April 2004, Government matches 10% of donations.
    – Tax relief for gifts made by Gift Aid:
    – Allows a charity to reclaim the tax paid by the donor on a gift, increasing the value of donor’s gift
    – Donor makes a one-time or regular donation, and provides to charity a declaration that he or she will pay an amount of income tax or capital gains tax equal to the tax the charity claims on their donations.
    – Charity reclaims the tax at the basic rate on the donation from the tax authority. Essentially, this means that the donation is worth an extra 28% to the charity. Donors who pay the higher rate of income tax can claim the difference between the higher rate of 40% and the basic rate of 22% on the grossed up donation.

    – Tax Relief for gifts of shares or other securities:
    – Individuals may deduct from income amount of gifts of shares or other securities
    – Amount that can be claimed is the market value of the investments on the day they are given to the charity

  • Gifts of investments to charity are also exempt capital gains tax
  • Business Donors
    – Gift Aid: Under the Gift Aid system, businesses may deduct the amount of their donations in calculating profits subject to tax.
    – Gifts of shares or other securities: business may deduct amount of gift in calculating profits, in addition to exemption from corporation tax for gains on gifts on investments

Incentives for Philanthropy – Germany

  • Both individuals and business are entitled to tax deductions for their donations
  • To be eligible for tax deduction, donation must be to “charitable, church, religious and scientific purposes and those public benefit purposes that are especially support-worthy.”
  • Gifts by Individuals
    – Are deductible up to 5 % of income before the deduction of the donation
    – Are deductible up to 10% where the donation is to scientific and charitable organizations or “cultural organizations recognized as especially deserving of support.”
  • Gifts by Businesses
    – Businesses may deduct donations up to 0.2% of the sum of turnover and salaries

Incentives for Philanthropy – Sweden

  • Gifts by individuals
    – No tax relief
  • Gifts by businesses
    – Companies may deduct donations that serve a business purpose as a business expenditure, but otherwise donations are not deductible.

Incentives for Philanthropy – the Netherlands

  • Both individuals and businesses may claim tax deductions for their donations
  • Donations may be in the form of cash, annuities, or in-kind
  • Donations may be made to churches, and charitable, cultural and scientific institutions, as well as institutions that serve the general interest
  • Gifts by Individuals
    – Individuals may deduct amount of donations exceeding 1% of gross income or 54 € up to 10% of gross income
  • Gifts by Businesses
    – Businesses may deduct donations exceeding 227 € up to 6% of annual taxable profits
    – Gifts that are related to business interests (serve a business purpose) may be deducted without restriction

Incentives for Philanthropy – Central and Eastern Europe
The following charts describe tax incentives for donations by individuals and businesses:

“1%” Laws

  • Pioneered in Hungary in 1996
  • In Hungary, the law grants private individuals the right to designate the use of 1% of their taxes paid to a nonprofit organisation and 1% to a church
  • To be entitled to receive 1% contributions, a foundation, association or public foundation must carry out public benefit activities. State museums and other state cultural institutions, and issues of national significance, determined annually – e.g. flood relief or emergency medical services, are also eligible to receive contributions.

Other 1% Initiatives in CEE

  • Slovakia has enacted a 1% Law that permit 1% designations by both individuals and businesses
  • Lithuania has enacted a 2% Law
  • Poland is considering a 1% provision in its draft Law on Public Benefit Activities and Volunteerism. raksts

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