How to Deduct Charitable Contributions Made by Your Small Business
Giving to charity is easy — and can be a great marketing tool. But claiming donations on your taxes is more complicated. If you want to claim a business tax deduction for your charitable giving, you’ll need to do some planning before writing the check.
Find a Qualified Charity
If you want a tax benefit from your contribution, only give to qualified charities. Usually, only 501(c)(3) organizations are qualified. A donation to an individual or other 501(c) designated nonprofit is generally not deductible.
Not sure if an organization is qualified? The IRS has a search tool to help you research the organization.
Understand Donation Types
Not all donations are created equal.
- A cash or check donation is deductible with proof of the donation.
- Volunteered services are not deductible. You can, however, deduct the cost of any expenses incurred while volunteering (supplies you purchased, for example).
- Mileage incurring while volunteering is deductible as long as you weren’t traveling to the location for any other purpose. The rate for charitable contributions is 14 cents per mile in 2014.
- Donations of goods, services, or property are deductible. (See details below.)
If the organization gives your business anything in return for your donation, deduct its value from your gift. For example, if you make a $500 donation to a community organization and they gave you a one-page advertisement in a publication, deduct the fair market value of the ad space from your donation.
For any contribution over $250, obtain a letter from the organization stating the amount of the gift and whether you received any goods or services in exchange for the donation.
Deductions are limited to 50 percent of your gross income, but some donations are only deductible up to 20 or 30 percent. Refer to IRS Publication 526 and read the section about limits on deductions for more information.
More on Property Donations
Property is deductible up to its fair market value. IRS Publication 561 provides guidelines on how to determine fair market value. If your non-cash contribution is greater than $500, complete IRS Form 8283 [PDF].
If the value is $5,000 or less, complete Form 8283, Section A. For donations worth more than $5,000, obtain a qualified appraisal and complete Form 8283, Section B. Other rules apply when donating cars, inventory, or investments. Read IRS Publication 526 for more information.
Individual vs. Business Donations
The rules governing charitable giving are similar for businesses and individuals. If you’re a sole proprietor or LLC, your business taxes are filed on your personal return. In order to gain a tax benefit, you have to itemize your deductions on Schedule A.
If your business functions as a partnership, business income and expenses are passed to the individuals on Schedule K-1 based on the percentage of ownership. If you own 60 percent of the business and your partner owns 40 percent, you could deduct $600 of a $1,000 donation provided that you as an individual qualify for the deduction. Multimember LLCs and S corporations work the same as partnerships.
Because most business types pass income and expenses to the owners to file on their individual taxes, the IRS sees charitable contributions as originating from you, the individual.
C corporations function much like sole proprietorships since they are stand-alone entities. However, in a C corporation, the donation does originate from the company. To ensure you adhere to the tax rules governing charitable giving, it’s wise to seek the advice of a tax professional.