Understanding the Charitable Giving Tax Deduction – What Can Your Small Business Write Off?
by Caron_Beesley, Community Moderator
- Created: July 9, 2012, 7:48 am
- Updated: November 5, 2012, 1:46 pm
Small businesses are known for their philanthropic gestures. In fact, surveys suggest that 75 percent of small firms donate to charities each year, averaging a contribution of six percent of their profits. Women-owned businesses tend to donate an average of 10 percent of profits, and those with the highest revenues are, not surprisingly, the most generous. (Source)
Contributing to a worthwhile cause has many benefits beyond the act of goodwill itself. It gives local business owners an opportunity to embed themselves in the community and network with other donors. And, of course, there are tax deduction benefits.
But what exactly are these benefits? If you are thinking of making charitable donations in the near future, here are some FAQs to consider:
What does the IRS consider to be charitable giving?
In the eyes of the IRS, charitable donations are gifts made to qualified charitable organizations. These include, but are not limited to, churches, nonprofit organizations such as a volunteer fire company, a foundation or trust fund or any other organization “operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.”
Most operate as federally-approved 501(c)(3) organizations. This online search tool from the IRS lets you search for charities eligible to receive tax-deductible charitable contributions. Donations can include cash, volunteered services, sponsorship of local charity events, or donating inventory or services. All are forms of charitable giving.
What tax benefits can charitable giving provide?
Charitable contributions can qualify as tax deductions against your business’ annual tax liability. However, the IRS tax code is complex and it’s important to note that not all contributions can be considered legitimate deductions.
Here’s what you need to know about what you can and cannot deduct:
- Monetary contributions – Cash or other monetary contributions may be tax deductible as long as they are not set aside for use by a specific person. Contributions must also be made during the tax year to be eligible for a deduction, regardless of the accounting method you use. When you file your claim you’ll need to use Form 1040, Schedule A and itemize each deduction. Generally, you can deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations may apply (refer to Limits on Deductions from the IRS).
- Donations of property, including business inventory – These are also considered a valid tax deduction. Donations are evaluated and deducted based on their fair market value (basically what a consumer would pay for these goods in an open market). Deductions are limited in most cases to 50 percent of your adjusted gross income. For donations of over $500 in value, you’ll need to complete Form 8283.
- Volunteering – While you can’t deduct the value of your service, you can deduct certain expenses incurred and related to your volunteer work. For example, if you host a party or fundraiser for the organization, you can deduct the costs. Other deductibles include supplies (e.g. stationery), the costs of a uniform and telephone expenses.
- Benefits you receive as a result of your charitable contributions – If you received something in return for your donation, you can only deduct the amount of your contribution that is over and above the value of the benefit you receive. For example, say you attended a fundraiser and placed a winning bid on a weekend in Las Vegas where the trip is valued at $2,500, but you actually bid $5,000. Your deductible contribution (i.e. the fair market value of the trip, in this instance), is the value of your total contribution ($5,000, minus the benefit you receive ($2,500), for an allowable charitable contribution deduction of $2,500. Find more information about this type of deduction and other scenarios that might qualify in the IRS guide: Contributions for which you Benefit.
Another useful reference is the IRS’ guide to monetary and property contributions that cannot be deducted.
When in doubt, consult your accountant or tax attorney.
Keep Good Records
This is an absolute must when it comes to preparing your taxes and ensuring you can back up your deduction claims should the IRS initiate an audit. The IRS offers information here on the records you need to keep for monetary, non-monetary and out-of-pocket cash expenses when donating your services.
- SBA Guide to Small Business Tax Expenses and Deductions
- SBA Community: Filing and Paying Taxes Discussion Board
- Going on the Road? How to Deduct Your Small Business Travel Expenses
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