This Reddit post:

So what an individual can do is offer to donate, say, 10% of his company to a charity. Let's say that the company did really well last year so that guy can easily find an accountant to say that 10% is worth $10M. So the guy has a $10M tax deduction he can use as he sees fit (subject to [1.] AMT and other sh[__], but you get the point). The guy also knows that last year's performance was a blip and if he repeated that 10% donation this year, he'd only get a valuation of $5M. [2.] In effect he's got an extra $5M from the valuation.

  1. What's AMT? Alternative Minimum Tax?

  2. I don't understand embolded sentence #2. How's it true? Last year, 10% of his company = $10M, as "a blip". So this higher valuation didn't originate out of nowhere?

This year, 10% of his company < $10M. So he can still exploit donations to save tax, though a lower amount?

  • Although the phrase "can easily find an accountant to say that 10% is worth $10M" makes things sound a little "dodgy" (implying the company is not really worth $100M), I suspect that probably doesn't matter... so long as he actually donates $10M to charity, then that's the figure that matters as far as any tax allowances are concerned. – TripeHound Apr 30 '18 at 7:24

1)The alternative minimum tax is part of the US federal tax code. For high-income individuals, it creates a dual system of taxation. If the alternative minimum tax is greater than the regular tax, then the alternative tax must be paid. They then can receive a somewhat restricted credit against future years regular income taxes provided they were not required to pay the AMT in that year. The tax has a different set of allowable deductions and tax rates.

Depending on the entire combination of deductions and sources of income, the value of the charitable deduction may be altered even though charitable deductions are allowed under the AMT. This is because the tax brackets are not coordinated with the regular part of the tax code.

2) The issue is that if a firm were not valued by its long-run discounted cash flow, but rather as a multiple of earnings then it would appear to be more valuable. Since it was transient additional income, the deduction is more valuable if the justification can be successfully made. The owner would have to pretend to not believe the earnings are transient.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.