How Small Businesses Can Get Tax Deductions for Charitable Giving
by jdelung, Contributor
- Created: December 16, 2013, 7:53 am
- Updated: December 16, 2013, 7:53 am
Most small businesses make charitable donations. In fact, surveys have shown that about 75 percent of small business owners donate some portion of their profits — about 6 percent on average — to charitable organizations each year.
As we’re in the midst of the holiday season (and tax season looms), many small business owners are likely considering charitable contributions and wondering how such donations might impact the bottom line in terms of tax deductions. First, it’s important to choose the right charity and avoid certain pitfalls that could leave you in a bind.
Choosing the right charity
Only certain types of contributions qualify for a deduction (more on that later), so if getting the tax benefit is part of your goal, it’s important to properly research any organizations to which you plan to donate. However, you might also think about other potential benefits (aside from the great feeling you get from helping others) such as how the donation aligns with your public relations strategy for corporate social responsibility and how meaningful a volunteer project or fundraising initiative might be for employees.
Although tax deductions and the rewarding benefit of helping those in need are often goals in charitable giving, you should also consider that such acts also open up an opportunity to showcase the good work you’re doing in the community to potential employees and customers. 85 percent of consumers have a more positive image of companies who are philanthropic. Employees who have a favorable impression of their company’s philanthropic program are five times more likely to remain with their employer.
For more on aligning your charitable giving strategy with your business strategy, follow these five tips from Small Business Trends. You should also consult the FTC’s checklist for avoiding charity scams.
Getting the deduction
Again, not everything qualifies. But by following these general guidelines and consulting your accountant or tax attorney, your small business should be set to get credit.
- Identify an eligible charity, usually a 501(c)(3), using this IRS search tool
- Make an eligible donation: cash, volunteered services, sponsorship of a charity event or the donation of inventory or services
- Understand that each category has its own limitations (for example, you can’t deduct the value of your volunteered service, but you can deduct expenses incurred such as supplies) — links to all the related forms and limitation information are available from the IRS (see also: IRS Publication 526)
- Ensure the donation is paid in full by the end of the tax year and reported through Form 1040, Schedule A
- Take your deduction, but remember that the IRS limits the amount of charitable donations that can be considered tax-deductible to 50 percent of your adjusted gross income
- Keep records — you’ll want them in the event of an IRS audit. Generally, an organization should give you a written statement if it receives a contribution from you
Charitable giving boils down to determining your strategy, properly researching the organization to which you wish to donate and following the IRS’ guidelines for giving. Do those three things, and your small business will be well on its way to giving back.
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