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ND Endowment Tax Credit

Tax Credits Bring Great Tax Incentive for "Business" and Individual Gifts to Our Qualified Endowment Fund

Are you a North Dakota individual taxpayer or an owner of a North Dakota business?... or are you a beneficiary of a trust or estate which derives income taxable in North Dakota?... If so, you have been presented with an unprecedented tax incentive if you make gifts that help secure the future of a qualified North Dakota nonprofit organization(s) through a gift to its qualified endowment fund(s).

The 2007 and 2011 North Dakota Legislatures have passed legislation which allows a significant income tax credit for certain gifts to "permanent, irrevocable" endowment funds of qualified North Dakota charitable organizations. This legislation pertains to certain "business" gifts made in a taxable year beginning after December 31, 2006 and also to certain gifts made by individuals and "businesses" made in taxable years beginning after 2010. Qualified donors will likely find that well over 50% of their gifts will be "subsidized" through State and Federal tax incentives!

We Have Established a Qualified Endowment Fund

Oak Grove Lutheran School has recently established the Oak Grove Tax Credit Endowment Fund II. We have worked closely with professional counsel so that gifts to this recently-established endowment fund will qualify for the major tax incentives established under 2007 and 2011 legislation.

The purpose of our new endowment fund is to provide ongoing financial support in furtherance of the mission of Oak Grove Lutheran School.

The operating policies of our endowment fund allow for only limited distributions from the donors' gift contributions (principal). The income and net appreciation (and a portion of principal in certain situations) from the fund's invested assets may be used to support the mission of Oak Grove Lutheran School.

Eligible "Business" Donors

Gifts from the following entities may benefit from this tax legislation:
  • 1. "C" corporations (pay tax at the corporate level)
  • 2. "Pass-through" entities (tax credit usually claimed by owners)
    • a. Subchapter "S" corporations
    • b. Partnerships
    • c. Limited liability companies
  • 3. Estates (if file income tax return)
  • 4. Trusts
The tax credit for gifts from estates and trusts will be allocated between these entities and their beneficiaries based on the portion of income which is distributed to those beneficiaries.

The 2011 Senate Bill 2160 has allowed contributions from banks to qualify for the tax credit allowed to other business entities.

How the Tax Credit Works for "Business Gifts"

An income tax credit is far more valuable than a deduction since a credit offsets the computed income tax. This particular tax credit is claimed on the North Dakota income tax return. The amount of the credit is 40% of the value of a gift made to a qualified (permanent, irrevocable) endowment fund of a ND nonprofit organization, provided that the gift is deductible for Federal tax purposes. The tax credit allowed in any one year may not exceed the current year tax liability; unused credits may be carried forward for up to three additional tax years.

The annual limitation on this tax credit is $10,000, determined at the entity level. Therefore, eligible gifts totaling up to $25,000 per year will bring about the maximum annual credit.

Clarifying Examples

Situation #1 - XYZ, Inc., a North Dakota "C" corporation, makes a $15,000 gift to the (name of your endowment fund) during its fiscal year ending September 30, 2011. In addition to providing a tax deduction on XYZ's Federal corporate tax return, this gift qualifies XYZ, Inc. for a $6,000 ($15,000 x 40%) tax credit on its North Dakota corporate income tax return. The $6,000 credit completely offsets the $3,500 tax computed for the year ending September 30, 2011. The unused $2,500 tax credit will be available for use over the next three succeeding tax years.

Situation #2 - Partnership ABC has four equal partners. All of the partners are North Dakota residents. During its 2011 tax year, ABC makes a gift of $20,000 to the (name of your endowment fund). ABC also makes a gift of $5,000 to another qualified North Dakota endowment fund that year. The total ND income tax credit available to the partnership is $10,000 ($25,000 x 40%). Since the partnership passes through its tax attributes to the four individual owners, each of the four partners will receive a $2,500 income tax credit for use on their 2011 North Dakota individual tax returns.

How the Tax Credit Works for Individual Donors

The 2011 legislation allows a 40% tax credit for gifts by individuals to a qualified endowment fund held by a qualifying North Dakota non profit organization. If an individual makes a gift(s) to such an endowment fund, the aggregate of the year's gifts to a particular fund must be $5,000 or more. The maximum credits that may be claimed under this subsection are $10,000 ($25,000 in gifts) for an individual or $20,000 ($50,000 in gifts) for married individuals filing jointly. Unused credits may be carried forward for up to three additional tax years.

Example of Gifts to Multiple Endowments

Consider a donor who made a $20,000 gift to Endowment Fund A for Charity X. Additionally, the same donor made five gifts of $1,000 each to Endowment Fund B of Charity Y, in addition to making a $2,500 gift to Endowment Fund C of Charity Z. (All funds were "true endowments" and therefore all the gifts had the potential to qualify for the tax credits). Since the gifts to Endowment Fund C totaled less than $5,000, they do not qualify. The gifts to Charities X and Y do qualify; therefore, the total qualifying gifts were $25,000 and created a tax credit of $10,000.

Example of Tax Benefit to Individual Taxpayer

Mrs. Smith, a North Dakota resident, donates $20,000 in cash to your endowment fund. She receives an $8,000 tax credit (40%) on her ND return. If she is in the 28% Federal tax bracket, her Federal tax savings are $3,360 (28% of $12,000; $12,000 is the difference between the $20,000 charitable deduction offset by an $8,000 reduction in the state income tax deduction). The "cost" of her $20,000 gift is offset by $11,360 in tax savings (56.8% of the gift amount).

An Invitation

Gifts to this new endowment fund will enable us to look to the future with increased confidence as we continue to fulfill our vital mission. If you are a North Dakota individual taxpayer or an owner (or beneficiary) of one of the qualifying businesses or other entities listed above, we hope that you will consider a gift to the Oak Grove Tax Credit Endowment Fund II. Your gift would be highly valued and appreciated!

Disclaimer: The above article is intended to provide information of a general nature only. It should not be construed as legal, tax and/ or financial advice. Readers are urged to consult their own professional advisors for their specific situations.

Gifts to Oak Grove Lutheran School are tax-deductible under Federal income tax law.