“Giving is its own reward” said social activist Dorothy Day, but the tax law also provides some benefit to those who give. At this time of the year, attention to charitable giving is more important than ever because there are so many individuals who have suffered from disasters this year; others continue to face economic challenges and still others just need a helping hand during the holiday season. Here’s how your business can help those in need, and what you can gain tax wise.
Cash donations, which includes donations by check, credit cards, and electronic transfers, is the most common type of donations. You can deduct the amount given to IRS-recognized charities. Use the IRS’s Search for Charities to make sure the organization you’re donating to is tax-exempt. You cannot deduct gifts directly to an individual, no matter how needy the person may be.
Owners of pass-through entities report their share of the company’s donations on their individual returns. Cash donations are deductible by those who itemize up to 50% of adjusted gross income. Donations by C corporations are limited to 10% of taxable income.
Giving inventory may benefit the charity as well as your business. You can, for example, dispose of excess or obsolete inventory (that still has value), which is still very useful to a charity. Tax-wise, your donation is limited to your tax basis (typically your cost) if the fair market value of the property is greater.
C corporations. Donations of inventory items to a charity that cares for the ill, the needy, or infants receives an enhanced donation. This is your basis (cost), plus one half of the profit that would have been recognized if you’d sold the inventory at its fair market value. The deduction, however, cannot exceed two times your basis.
Food inventory. For all types of entities there’s also a similar enhanced deduction for donations of apparently wholesome food. Again, the donation must be made to an organization that uses it for the care of the ill, the needy, or infants.
If this is a slow time of the year for your business, consider giving employees time off. While you can’t require them to use the time for charitable purposes, you can encourage them to do so. For employment tax purposes, this paid time off is treated as any other compensation.
You cannot deduct the value of your time. So, for example, if you have an electrical business and do wiring for a local charity, you cannot deduct what you would have charged for labor. However, any materials you use for this activity is deductible as an unreimbursed out-of-pocket expense.
The actions you and your staff can take to benefit charities are endless. Here are some ideas:
- Participate in local charitable activities, such as being a drop-off point for Toys for Tots.
- Hold a blood drive. During the holiday season, local blood banks routinely find themselves short of blood and can use the donations.
- Attend fundraisers. Your donation is limited to the amount that exceeds the benefit you receive.
- Leave-based donations. Set up an in-house fund to which employees can donate their unused vacation, sick, and personal days. These unused days can then be used by an employee in need. Generally, the donated leave time is still taxable compensation to employees, and subject to employment taxes. However, from time to time the IRS let’s employers donate the unused leave time to charities benefiting victims from specific disasters, such as the Louisiana floods and Hurricane Matthew this year. If so, employees aren’t taxed on their donated leave time and the company gets a charitable contribution deduction.
If you give any money or property, be sure to properly substantiate the donation if you want to claim a write off. You must receive a written acknowledgment for a donation of $250 or more and retain checks or other proof for a smaller donation. For more information, see IRS Publications 526, Charitable Contributions.