Private School Tuition and Tax Deductions

[mike]

I got this on Tuesday:

For what it’s worth, this is from a partner at SingerLewak out of Los Angeles. A top 100 accounting firm in the US based on revenue. Not a fly by night accountant who tactfully navigates deduction boundaries with creativity.

And this guy was reading Mennonet?

I got an answer forwarded from SingerLewak’s nonprofit team this morning.

“Finally! I found the right partner to discuss your question with. This is embarrassing how long this took! I promise to do better.

(Name) specializes in Not for Profits and works with some very large ones in LA.”

Forwarded email:
“HI (name of partner) - So long as the donation is not earmarked for the benefit of a specific child attending the school, the donation shall be tax deductible as a general donation to the church (which is intrinsically a 501(c)(3) organization). The church can turn around and use the money for whatever purposes it deems necessary (within its own purpose, of course). Furthermore, they also do not accept tuition from non-members to attend the school, so that factor doesn’t weigh into this case.”

This confirms that the way my church school is funded, is in fact tax deductible.

So if you pay your tuition in the church's school offering, and the school does not track who is giving what, it would be tax deductible. But if your "donation" is tracked and recorded, and the school considers that "donation" as payment for your family's school students, it would not be.

[RZehr]

That seems about right.

[RZehr]

By contrast, neither you nor RZehr have provided a single piece of evidence that that IRS has blessed this sort of arrangement or any guidance from the IRS or any other source explaining that this sort of arrangement is sound. Not even the written opinion of a tax attorney saying these arrangements are appropriate.

Now what do you think?

[Ken]

By contrast, neither you nor RZehr have provided a single piece of evidence that that IRS has blessed this sort of arrangement or any guidance from the IRS or any other source explaining that this sort of arrangement is sound. Not even the written opinion of a tax attorney saying these arrangements are appropriate.

Now what do you think?

I would agree that you found evidence supporting your position.

However the fact that a professional accountant had to actually take this question up with one of the partners at a big firm suggests that the answer is far from straight forward. And if someone ever gets audited over this I suspect it will come down to individual circumstances and the judgment of the auditing officer. Because there is obviously not clear and unambiguous IRS guidance on this topic. But you are probably on safe ground if you are organized according to their suggestions.

I'm in the middle of doing our 2023 taxes and despite generous charitable contributions, it doesn't look like we are going to reach the standard $27,700 deduction for married filing jointly. So for us, and I suspect the vast majority of taxpayers, it is a moot point.

[Josh]

I would agree that you found evidence supporting your position.

However the fact that a professional accountant had to actually take this question up with one of the partners at a big firm suggests that the answer is far from straight forward. And if someone ever gets audited over this I suspect it will come down to individual circumstances and the judgment of the auditing officer. Because there is obviously not clear and unambiguous IRS guidance on this topic. But you are probably on safe ground if you are organized according to their suggestions.

OK, Ken, if one can't consult high end attorneys for advice on this, then who on earth is authoritative? The IRS is generally not very focused on suing small churches and schools, or their donors, into oblivion.

I'm in the middle of doing our 2023 taxes and despite generous charitable contributions, it doesn't look like we are going to reach the standard $27,700 deduction for married filing jointly. So for us, and I suspect the vast majority of taxpayers, it is a moot point.

It's quite relevant for anyone who (a) makes corporate donations (which are deductible from the first dollar), (b) uses a donor-advised fund (also deductible from the first dollar, including wiping out your capital-gains basis, or (c) making the donation from another nonprofit foundation you control. All 3 of these things are quite common.

In my state, donations I make to a private school are explicitly a tax credit against any state income tax I might owe, so it's also relevant for that...

[Ken]

I would agree that you found evidence supporting your position.

However the fact that a professional accountant had to actually take this question up with one of the partners at a big firm suggests that the answer is far from straight forward. And if someone ever gets audited over this I suspect it will come down to individual circumstances and the judgment of the auditing officer. Because there is obviously not clear and unambiguous IRS guidance on this topic. But you are probably on safe ground if you are organized according to their suggestions.

OK, Ken, if one can't consult high end attorneys for advice on this, then who on earth is authoritative? The IRS is generally not very focused on suing small churches and schools, or their donors, into oblivion.

I'm in the middle of doing our 2023 taxes and despite generous charitable contributions, it doesn't look like we are going to reach the standard $27,700 deduction for married filing jointly. So for us, and I suspect the vast majority of taxpayers, it is a moot point.

It's quite relevant for anyone who (a) makes corporate donations (which are deductible from the first dollar), (b) uses a donor-advised fund (also deductible from the first dollar, including wiping out your capital-gains basis, or (c) making the donation from another nonprofit foundation you control. All 3 of these things are quite common.

In my state, donations I make to a private school are explicitly a tax credit against any state income tax I might owe, so it's also relevant for that...

This thread started in November and it took until late February for a professional accountant to consult with the partner of his firm to come up with a definitive answer. That is the very definition of an answer that was not straightforward.

What you are talking about with state income tax deductions is a separate issue under state law. The IRS doesn't regulate state income tax credits.

How many conservative Anabaptists using a communal church school funded by the church rather than tuition payments are doing any of the following:

"(a) makes corporate donations (which are deductible from the first dollar), (b) uses a donor-advised fund (also deductible from the first dollar, including wiping out your capital-gains basis, or (c) making the donation from another nonprofit foundation you control. "

That isn't a snarky question. I'm actually curious how common these examples of creative financial engineering are in the plain community. Because none of them are common in the circles that I travel in.

[eccentric_rambler]

However the fact that a professional accountant had to actually take this question up with one of the partners at a big firm suggests that the answer is far from straight forward.

Or suggests that there are specialties in tax and that a firm that has specialists expects specialized questions to be routed to the appropriate specialist.

And if someone ever gets audited over this I suspect it will come down to individual circumstances and the judgment of the auditing officer.

No, the situation has common analogs. I am unaware of the issue ever being raised in an audit. There is probably case law but I don't want to dig for it.

Because there is obviously not clear and unambiguous IRS guidance on this topic.

IRC 170 is actually fairly clear, as tax law goes. The short version of the analysis is that:

1. Is the deduction made to a qualified organization? Yes, either a church or a school would qualify.
2. Did the taxpayer expect to receive goods or services in return? The regulations under IRC 1.170A-1 cover this, under (h). I think you are arguing that the answer to this is yes, see 1 below. While most Anabaptist taxpayers who support church schools in this manner expect to send their children to school, there is no requirement to contribute. Any member may send his children to school. Because the school is available to members regardless of the contributions they make, there is no exchange made.
3. I'm satisfied both tests are passed, and there are no others blocking the donation if the proper substantiation is available. You may disagree we have passed test two above, unfortunately law does not spell out every situation.

1. If this argument is taken to its logical end many contributions would no longer be deductible. For example, if a taxpayer donated money to a library, even if the donation was unencumbered by any stipulation it would still be nondeductible to the taxpayer if he used that library. Use of an organization when the use is available regardless of donation does not constitute an exchange.

[Josh]

How many conservative Anabaptists using a communal church school funded by the church rather than tuition payments are doing any of the following:

"(a) makes corporate donations (which are deductible from the first dollar), (b) uses a donor-advised fund (also deductible from the first dollar, including wiping out your capital-gains basis, or (c) making the donation from another nonprofit foundation you control. "

That isn't a snarky question. I'm actually curious how common these examples of creative financial engineering are in the plain community. Because none of them are common in the circles that I travel in.

People donating to various causes directly from their business is quite common. They will arrange these donations however their CPA tells them to do so. Corporation donations are one way, a donor advised fund is another. (They can also donate "in kind"; an example of such a donation I saw the books for was donating extra produce to the food bank.)

People using a donor advised fund is going to be common with anywhere that people accumulate stocks, bonds, and other investments. Everence runs a donor advised fund and can set this up for someone. Anabaptist Financial runs one too.

This is not "creative financial engineering", either. It is 100% legal and actually encouraged by the government. And now that deducting donations from your personal taxes is mostly a thing of the past, the avenues I described are going to be the bulk of deductible donations.

Do you have a problem with corporations and donors via a donor-advised fund making donations to nonprofits?

[RZehr]

However the fact that a professional accountant had to actually take this question up with one of the partners at a big firm suggests that the answer is far from straight forward.

It is reasonably straightforward.
The fact that this was done here doesn’t mean that it has to be. The fact that a Los Angeles firm had to dig for the answer shouldn’t be surprising.

Fact of the matter is, many small time accountants in Mennonite hotspots have this answer at their fingertips.

Matter of fact, on page 11 of this thread, I asked the attorneys and accountants this question at 4:33pm on 11/22/2023. And I already posted the answer on page 12 at 5:32pm of the same day. Less than an hour later.

So no, Mennonites who are likely among the few Americans who operate schools like this, do not have to spend 3 months with a top 100 accounting firm to sort this out. Come to think of it, they could just read this thread.

[RZehr]

I'm in the middle of doing our 2023 taxes and despite generous charitable contributions, it doesn't look like we are going to reach the standard $27,700 deduction for married filing jointly. So for us, and I suspect the vast majority of taxpayers, it is a moot point.

I assume that you take the standard $27,700 deduction if you have donated less than that? Why you be subsidized like this?