Charitable Giving and the Tax Benefits for Small Businesses
by JamieD, Former Moderator
- Created: October 13, 2009, 11:04 am
Small businesses participate in charitable giving for a combination of reasons: to contribute to a worthwhile cause, to network with other philanthropic business owners, and the tax benefits certainly don't hurt. Although the social and emotional benefits of charitable giving are obvious, it's often confusing for business owners to understand how it relates to their taxes. If your business is considering or has participated in charitable giving, you may be entitled to tax benefits.
Sponsoring a local charity event, donating inventory or services, making a cash donation, or volunteering, are all considered forms of charitable giving. From a business prospective, these contributions are extremely beneficial when they qualify as tax deductions. Although charitable contributions can be deducted on your business's income tax returns, not all contributions are considered legitimate deductions. The IRS has established a strict set of rules and regulations that govern the tax laws around charitable giving.
Tax deductible contributions must be made to a qualified organization.
Not all charitable contributions are tax deductible; only those made to qualified organizations are eligible. Qualified organizations must be legitimate, public charities and generally include religious, educational, scientific, literary and charitable groups. Most operate as federally-approved 501(c)(3) organizations, designating them as genuine and responsible to all non-profit regulations.
Search for charities that are eligible to receive tax-deductable charitable contributions.
Contributions of money made to, or for the use of, a qualified organization are tax-deductible.
As long as monetary contributions to a qualified organization are not set aside for use by a specific person, they can be deducted from your businesses federal income tax. Contributions must be paid in full before the end of the tax year to be considered eligible. The equivalent amount or maximum limit for your charitable contribution must be reported through itemized deductions on a Form 1040, Schedule A.
Property contributions, including business merchandise, can be tax-deductible.
Property contributions made to qualified organizations are considered to be a valid, tax-deductible form of charitable giving. Business merchandise, additional inventory, and equipment are all examples of gifts of property. Contributions should be evaluated and deducted based on the current fair market value, basically what a consumer would pay for the same property in an open market. If your property donations equal more than $500, you must complete a Noncash Charitable Contribution Form 8283.
For more information assessing your contributions worth, see the IRS guide to the Valuation of Various Kinds of Property.
Refer to the IRS guidelines for information on monetary and property contributions that CANNOT be deducted.
Benefits received for charitable contributions must be accounted for.
In many cases, those who contribute to charitable causes may receive something in return. Charity auction gifts, tickets to a benefit ball, and merchandise sales that benefit a cause are all examples of benefits that a donor may receive when making a donation. Only the amount of money that exceeds the fair market value of the benefit can be counted as a tax-deduction. For example, if you attend a charity auction where you bid on and win a four-night stay at Disney World, you would only deduct the amount that exceeds that trip's fair market value. If you bid $2000 and the trip is worth $800, you would deduct $1200 on your list of itemized deductions.
For more information, see the IRS guide to Contributions For Which You Benefit.
Deduction amounts are limited based on your business's income.
IRS guidelines limit the amount of charitable donations that can be considered tax-deductable to 50% of your adjusted gross income. For certain donations, that amount goes down to 20% or 30%. Limitations do not exist for contributions that equal less than 20% of your adjusted gross income. The IRS has detailed information on limitations on deductions for specific charitable contributions.
Take precautions to be sure your charitable donations are not taken advantage of.
Although it's easy to get wrapped up in the excitement and positivity when donating to a good cause, it's important to be aware that not everyone has the best intentions. Scam artists often try to take advantage of people's generosity to make a few dollars. As the nation's consumer protection agency, the Federal Trade Commission has created a Charity Checklist to help businesses protect themselves in their charitable contributions. You can also search for legitimate charities through the IRS site.
- Tax Information for Contributors
- 10 Tips for Taxpayers Making Charitable Contributions
- FTC Guide to Avoiding Charity Fraud
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