Small business owners are a generous bunch. According to a study by SCORE, two-thirds of small businesses donate to causes and their overall giving accounts for 250% more than what’s given by larger businesses. Nice work! If your business makes charitable gifts or plans to, take a few minutes to understand the ins and outs, and always talk to an advisor. Giving to charity feels great but can come with hassles come tax time, unless you prepare your business taxes properly. In addition, the Tax Cuts and Jobs Act made some changes to charitable contribution deductions beginning in 2018, and some folks are still trying to keep them straight.
For tax purposes, a charitable gift can be cash, inventory, property, or pro bono services, as well as a sponsorship of a charitable event.
As of the Tax Act and Jobs Act, you may deduct 60% of your adjusted gross income when giving to a nonprofit or most private foundations. You may deduct 30% when giving to veterans organizations, fraternal societies, cemetery organizations, and certain kinds of private foundations. The IRS website or a business advisor can help you figure out where your business’ charitable giving fits.
To be eligible for a deduction on your business taxes, the gift must go to a registered 501(c)(3). This rules out donations to private educational institutions, political organizations, candidates or your friend’s GoFundMe page. (Not that we discourage giving to anyone in need; it’s just not tax-deductible.) To confirm whether a recipient qualifies, use this tool from the IRS.
The burden of proof is on you to show how much and when your business made a charitable donation. Most nonprofits will automatically issue a receipt showing the gift amount and their Federal Tax ID number. If they forget, you should remind them soon after the transaction, rather than waiting until the next spring’s tax season. In the absence of a receipt, a canceled check or credit card statement can also work, but we like to see formal documentation.
If you’re a freelancer or independent contractor--not organized as a corporation-- your charitable contributions will be treated just like gifts from an individual and reported on your personal income tax form. Since you cannot deduct charitable contributions as a business expense, your giving will not impact your self-employment taxes.
To get the deduction you must itemize using Form 1040, Schedule A. The Tax Cuts and Jobs Act raised the standard deduction. However, the legislation also erased the limit on the total amount that higher earners could take for total itemized deductions. This means that for tax years 2018 to 2025, your ability to take this deduction is not limited by your income, as it once was. That’s a long way to say that you should first check to confirm whether itemizing your deductions makes sense for your situation.
If your business is a multi-member LLC or S-corporation, report charitable contributions on Schedule K-1 based on the share of the company you own.
If your business is a corporation, you can deduct eligible charitable contributions of no more than 10% of your annual taxable income. Corporations should report charitable contributions on Form 1120 with their corporate tax return.
Many small business owners and sole proprietors choose to share their talents with nonprofit organizations by volunteering. If you do so, you can’t deduct the value of the services you provide, but you can deduct the expenses associated with your volunteer work. For example, you might deduct travel expenses. You can expense 14 cents per mile when you travel to help an eligible nonprofit.
Donating property or goods, sometimes termed “in-kind” donations, falls under specific guidelines. The recipient must issue a tax receipt showing the fair market value of goods worth more than $250. It should include a description of the property you donated and whether you received any goods or services in exchange. Vehicles, including cars, boats or airplanes must be valued above $500.
When it comes to sponsorships, you often get something in return--advertising, a ticket to a gala, a dinner, etc. In cases like these, you can deduct what you gave minus the value of the things you got in return.
Charitable donations made by your business should be part of your overall tax plan for the year. Think ahead about how much you should give and how to spread it out through the year. A trusted CPA or business advisor can help you make a plan and stay on track. Above all, keep good records of your business giving.
At BAAP CPA we contribute to local nonprofit organizations, including SPCA Tampa Bay, and definitely not just for the tax benefits. There are a lot of reasons a business can give to great causes. Remember that SCORE study we mentioned at the beginning? It said, “85% of consumers have a more positive image of a company who gives to charity.”
Speaking on behalf of BAAP giving back allows you and your team to share a sense of purpose and it boosts morale. Taking part in local events gives you a way to get to know your community, and it shows your clients that you’re a real person with passions and personality. So go ahead and write that check! We’re here to help you make the most of your generous nature.