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. Last Updated: 07/27/2016

Law Limits Charity Write-Offs

Have you ever wondered about making a donation here and writing it off on your taxes?


According to Russian law, this is possible for both corporations and individuals. However, Western tax experts say that severe limitations and restrictions on how much and when donations can be deducted discourage most corporations and individuals from supporting their favorite charity or cultural activity.


"Here, tax deductibility is much more restrictive," said Peter Arnett, a tax manager with Ernst & Young. "The tax relief you get will be far less than the cash you give."


Point 1, Article 6, of the Russian law "On the Taxation of the Profits of Enterprises and Organizations" provides that taxable profits of an enterprise shall be reduced by the amount of charitable contributions. However, the total amount of contributions should not exceed 3 percent of the taxable profits; for contributions to certain funds and organizations, the limit is established at 5 percent.


That amount of allowable charitable contributions is then thrown into a basket of other concessions, such as capital loss and loss carryover. All concessions in total cannot offset more than 50 percent of the company's taxable profits. Additionally, there is no opportunity to carry over any unused contributions.


In comparison, a corporation operating in the United States is limited to charitable concessions of 10 percent of its taxable income, with certain adjustments. But any unused contributions can be carried forward up to five years.


The problem, said Cherie Ford Hunt, a senior tax manager at Price Waterhouse, is the short-term view of the Russian tax system.


Corporations currently generating losses or low profits have no incentive to donate charitably because they lose the deduction entirely. "Giving today while generating losses won't mean a deduction two years from now when the company may be generating profits, whereas in the U.S. it would," Hunt said.


The Russians don't understand that many companies experience heavy start-up costs to get a business running and should be encouraged to make donations if they could be carried over to years when they are generating profits, Hunt said. "The Russian tax authorities want to collect as much as they can now, regardless of the future consequences," she added.


"It's one of the frustrating things about doing business here," Arnett said.


Still, some Western and Russian companies are using tax write-offs to channel their capital into worthy causes. One company was able to donate expired goods to an orphanage and use this as a tax write-off under the charitable contributions concession, even though this would not have been possible in the United States because of the expiration date.


Russian banks and insurance companies are using the tax write-off concessions allowed under Russian law, according to a tax manager at Arthur Andersen. Such write-offs usually depend on the nature of the business and the donation being made.


For individuals, charitable contributions are deductible for personal income-tax purposes to the extent of 100 percent of their taxable income. As with corporations, there are no carryover rules. In the United States, an individual can deduct up to 50 percent of his contribution base, but may carry over any excess for up to five years, Hunt said.


For example, if an individual earned $10,000 as taxable income in Russia and gave $15,000 to his favorite charity, he could only write off $10,000 in total, with no opportunity to carry over the excess in future years.


In the United States, by comparison, the individual could write off $5,000 in the year of donation (assuming $5,000 is 50 percent of the contribution base) and carry over the remaining $10,000 in the five succeeding years, and thus deduct the entire charitable contribution of $15,000.


Tax experts say creating a sensible system that will encourage corporations and individuals to support the private sector will happen when the new Russian Tax Code is adopted. However, the code is currently being debated in the State Duma and is not expected to be in force before January 1988, said Ernst & Young's Arnett.