This document discusses how prior to 2006, S corporation shareholders' stock basis was reduced by the fair market value of appreciated property donated to charity, which could limit their charitable deduction. Congress changed this in 2006 so the basis reduction was the property's adjusted basis instead of fair market value, matching partnerships. This expired at the end of 2013. The document provides examples showing shareholders now may not get the full charitable deduction benefit and discusses planning considerations.

1. Donations of Appreciated
Property by S Corporations
Background
Prior to 2006, an S corporation shareholder’s stock basis was reduced by his pro-rata share of the fair market
value (FMV) of appreciated property contributed to charity. This treatment could lead to situations
whereby the S corporation shareholder would not be able to deduct the FMV of the charitable contribution
due to basis limitation provisions. Contrast this result with the treatment for partners in a partnership.
Specifically, Rev. Rul. 96-11 allows a partner to reduce his partnership basis by the adjusted basis (rather
than the FMV) of the contributed property.
In response to this disparity, the Pension Protection Act of 2006 effectively changed S corporation
shareholders’ basis adjustment for charitable contributions of appreciated property to be based upon the
shareholders’ pro rata share of the S corporation’s adjusted basis in the contributed property as opposed to
the FMV of such property. This change essentially brought the treatment of S corporation shareholders in
line with partners in a partnership. This temporary provision has been extended multiple times, most
recently by the American Tax Relief Act of 2012.
Without further legislative action, this rule regarding the basis decrease resulting from a charitable
contribution of appreciated property by an S corporation does not apply to contributions made in tax years
beginning after December 31, 2013. Thus, for contributions of appreciated property made in tax years
beginning after December 31, 2013, the shareholders’ stock basis will be reduced by the shareholders’ pro-rata
share of the FMV of the contribution.
S corporation shareholders face situations where they may not realize the full benefit of charitable
contributions of appreciated property.
Historically, S corporations were at a disadvantage compared to partnerships and LLCs when it came to
charitable contributions of appreciated property. Congress leveled the playing field, but only temporarily, in
2006. Now, with this provision having expired at the end of last year, S corporation shareholders once again
face situations where they may not realize the full benefit of the charitable deduction from these
contributions.
09/23/2014

2. Discussion
To illustrate the impact of this expired provision, consider the following examples contrasting the stock
basis reduction rules as noted for calendar tax years 2006 - 2013 versus the 2014 calendar tax year and
forward (pending any legislative changes).
Example (stock basis reduction 2006 - 2013): Assume that A is a 100% shareholder in an S corporation and
has a basis of $40,000 in his S corporation stock at the beginning of the year. The S corporation contributes
long-term capital gain property in 2013 with a basis of $30,000 and a fair market value of $60,000 to a
charity. The shareholder may take a full $60,000 charitable contribution deduction as his S corporation
stock basis is only reduced from $40,000 to $10,000.
Example (stock basis reduction 2014): Assume the same facts as above, except that the charitable
contribution is in 2014. The shareholder may take only a $40,000 charitable contribution deduction (with a
$20,000 basis limitation loss carryover to the next year) as his basis in his S corporation stock has been
reduced from $40,000 to $0.
The following table summarizes the varying results from the two examples noted above:
Description 2006-2013 2014
Charitable contribution deduction
passed through to the shareholder
Shareholder’s stock basis at end of
year
Basis limited charitable contribution
deduction carryover to the following
year
$60,000
$10,000
$0
$40,000
$0
$20,000
As one can see from the table, assuming that there is no other corporate activity and the corporation
dissolves with no liquidating distributions to the shareholder, the shareholder would have an additional
capital loss of $10,000 in 2006 - 2013 versus $0 in 2014. The difference between the total deductions/losses
taken of $30,000 (i.e., $60,000 + $10,000 = $70,000 for 2006 - 2013 compared to $40,000 for 2014) between
the two scenarios represents the benefit that a shareholder received of making the charitable contribution
of appreciated property during the 2006 - 2013 tax years as compared to the 2014 tax year.

3. Planning & Conclusion
To the extent that an S corporation has made charitable contributions of appreciated property for tax years
beginning after January 1, 2006 and before January 1, 2014, if the charitable contribution deduction and
related stock basis decrease was not treated properly refund opportunities may exist for open tax years.
Furthermore, even if refund opportunities are not available due to the statute of limitations having
expired, one may want to consider at least adjusting the shareholders’ stock tax basis schedules to properly
reflect the “basis reduction” as opposed to FMV for the charitable contribution of appreciated property.
With regards to 2014, if an S corporation has already made a charitable contribution of appreciated
property, discuss the current status of the basis adjustment with the tax return preparer and take into
consideration any basis limitations of such charitable contribution. The shareholders’ 2014 estimated tax
payments may need to be adjusted to reflect basis limited charitable contribution deductions.
For S corporations considering making a 2014 charitable contribution of appreciated property, one may
want to consider delaying such contribution. Congress may take legislative action to extend the “basis
reduction” approach, but until they do so (if ever), caution should be taken when an S corporation is
considering making a charitable contribution of appreciated property. For those who keep a scorecard of
the pros and cons of S corporations versus partnerships and LLCs (even though they are both flow-through
entities), if Congress does not take action to extend the “basis reduction” provision for the
contribution of appreciated property for S corporations, mark this topic as a con for S corporations.
If your S corporation has recently donated, or is contemplating the donation of appreciated property to
charity, consult your local CBIZ MHM tax professional to discuss the implications.
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