Some consumers want to patronize businesses that demonstrate social responsibility, and making corporate charitable donations is one way businesses show they care. In addition to impressing current and prospective customers, your business clients earn corporate charity tax deductions for their generosity. You can use your knowledge of this information to build your client relationships as you assist them in claiming business charitable donations on their tax returns.
Charitable Donation Tax Credits for Individuals
Your clients who are independent contractors, sole proprietors, and partnerships report their income as individuals, and they claim charitable tax credits just like individual filers. You might have these clients use Form T2125 (Statement of Business or Professional Activities) to report their business income and expenses, but they should report their charitable contributions on Schedule 9 of their T1 general income tax return instead.
Claiming Charity Donation Tax Write-Offs
Say a client is a sole proprietor of a plumbing business and makes a donation in the name of the business. Because the business isn’t incorporated, your client can claim the sole proprietorship charitable donation on their personal income tax return. As of 2018, your client can claim a charitable tax credit of 15% of the first $200 donated, and 29% of any amounts donated over that threshold. On top of that, your client may also be able to claim provincial tax credits. These tax credits are non-refundable, which means they can reduce your client’s tax bill but can’t trigger a refund.
What Are Eligible Donees?
Whether your clients are individuals or corporations, they can only write off charitable donations they make to eligible donees, which are:
- Registered charities
- Canadian amateur athletic associations
- Low-cost housing corporations for the aged
- Municipal or public bodies
- Prescribed universities outside of Canada
These organizations and entities must register with the Canada Revenue Agency (CRA) to accept donations and issue receipts.
Generally, the CRA distinguishes between charities and nonprofit organizations. Charities must benefit communities through poverty relief efforts, educational programs, and religious pursuits. In contrast, nonprofit organizations can focus on social welfare, civic improvement, or any other purposes not related to pursuing profits. For example, a local soccer league may be a nonprofit while a soup kitchen is likely to be a charity.
Your clients might want to donate to nonprofit organizations to make the community more aware of their companies. Say a partnership decides to donate jerseys to a local hockey team. As your client’s accountant, you should ensure your client understands such donations are not deductible unless that team is registered as part of an amateur athletic association.
How Businesses Deduct Charitable Contributions on Corporate Returns
Your corporate clients can deduct charitable donations totalling up to 75 of their net income. For example, a corporation with $1 million in net income can make charitable donations of up to $750,000. While your clients can roll forward donations they can’t claim in the current year, most donations expire after five years.
If you have corporate clients that want to claim deductions for charitable donations, you need to fill out Schedule 2 for them. The first part of this form records most of the eligible donations your client makes, and the second section helps calculate the maximum deduction your client can claim. If your clients earn capital gains on a donated asset, they may be able to claim more than 75% of their income in charitable deductions. The second part also helps you calculate this number. Say your client donates a building to a registered charity, and incurs a capital gain by making the donation. In this situation, they can claim a larger deduction. The exact amount varies based on factors including the capital gain and recapture of capital cost allowance.
You can help your corporate clients claim deductions for cultural gifts they donate, too. Certified cultural property includes any property important to Canada, and your clients can claim these donations in the third section of Schedule 2. Each property must have a certificate from the Canadian Cultural Property Export Review Board. Just as they can with other tax deductions for business donations, your clients can roll these deductions forward for up to five years.
The fourth part of Schedule 2 is for gifts of certified ecologically sensitive land. These deductions work the same as other corporate charitable deductions, with one notable exception. As of 2018, your clients can take up to 10 years to claim ecological gifts they made or make after Feb. 10, 2014. If your clients donate medicine, they can report that in the fifth part of Schedule 2. They receive a 50% increase on their donations deduction for gifts made before March 22, 2017. The sixth and final part of this form is a simple chart that helps you track the amount your client rolls forward to future years.
Claiming Extra Charitable Donation Tax Credits
By staying up-to-date on the latest charitable deductions and credits, you can help your clients lower their tax liabilities and make fully informed decisions about how they make their charitable contributions. For example, your clients may be able to claim a larger charitable donation tax credit for business donations they make. As of 2018, farmers in Ontario, Nova Scotia, and British Columbia who donate food to eligible food banks can claim a 25% increase on the value of their deduction. So a Nova Scotia farmer client who donates food with a fair market value of $100 can claim $125 on their tax return.
Helping your small business and corporate clients claim all of the available charitable tax deductions and credits creates a win-win situation for them as well as for you. You add to their bottom line while you strengthen your client relationships and encourage positive word of mouth. Want more benefits? Accelerate your year-end adjustment process and start saving time on corporate returns with QuickBooks Online Accountant. Sign up for free.