As a small business owner, you reap numerous non-financial benefits by making small business donations to charity. From a financial perspective, if you plan on making charitable donations this tax year, it may be time to evaluate whether to make them from your business account or personal account.
How Much Can a Person or Business Donate to Charity for Tax Credit?
As of 2018, charitable donation deduction rules are similar whether you’re filing a personal Canadian income tax return or a corporate income tax return.
You can claim a nonrefundable tax credit of up to 75% of your net income as an individual. Your individual limit goes up to 100% of net income in the year preceding your death and in your year of death.
If you’re donating gifts as a corporation, you can claim up to 75% annually, applying your donation as a deduction against taxable income. This tax treatment applies to cash and in-kind gifts.
Gifts in kind are gifts of tangible property that are not cash. In-kind donations include:
- Real estate
- Works of art
- Motor vehicles
- Stocks and bonds
If you make a gift in kind, its value is the fair market value of the item on the day you make the donation. If you’re not sure what your property is worth, consider hiring an appraiser to provide an estimate of value, keeping your receipts for any appraisal cost to document your tax deductions. Donations of time or services don’t qualify for a charitable tax receipt, though.
Whether you’re making personal or business donations to charity, you can’t claim charitable donations to create a net loss or increase a current loss. However, you’re permitted to carry forward unused charitable donations for up to five tax years.
If the government classifies your business as an investment holding company, there’s an additional incentive to donate through your business enterprise. Since these entities pay taxes at a higher rate than other businesses, if you make a charitable donation from an investment holding company, as a business owner, you get more bang for your buck than if you make it from a traditional business or personal account.
Verifying Qualified Donees and Registered Charities
It’s important to ensure your donations are going to a Canadian registered charity or qualified donee. The Canada Revenue Agency (CRA) keeps a list of qualified donees and registered charities on its website, and it’s a good idea to verify the status of an organization before you make a business donation. Calling the Charities Directorate at 1-800-267-2384 also garners you this information. Qualified donees include:
- Public foundations
- Private foundations
- Charitable organizations
Only registered charities or qualified donees can issue tax receipts for your donation, although they aren’t required to issue receipts. The receipt is valuable at tax time to ensure proper credit for your deductions and if you undergo an audit.
If your business donates to a charity that gives you something of value in return for your gift, the CRA calls it an advantage. To compensate, the charity must deduct the advantage value from the value of your donation to compute the eligible amount to record on your receipt.
Examples of How to Donate to Charity Through Business and Personal Accounts
There are numerous tax implications when you make a donation to charity through business or personal accounts. Say your business has $5,000 to donate:
- Your donation may reduce your business tax liability. But if you donate the money from personal funds, you may be able to reduce your personal taxes, assuming you have cash on hand for making the donation. Taking income from the business to make the personal donation may change your tax benefit outcome.
- If you withdraw the $5,000 as salary from your business, you must pay tax on it first. That tax payment figure might offset the tax benefit of making the charitable donation from a personal account. In this scenario, it might make more sense to give the charitable donation from the business directly.
- If you take the $5,000 out as a dividend, the business and you as the shareholder must pay tax on it. This scenario involves many moving parts and tax rates. It’s not clear whether it’s better to make individual or business donations to charity this way.
Considering your business situation and personal desires is a first step in making a donation decision that’s right for you. Do you consult with accountants, tax professionals or financial advisors? They can analyze your circumstances and goals in light of the latest charitable donation rules, explain your options, and make sound recommendations.
Being generous in giving business donations to charity helps organizations fulfill their missions and can help your business establish goodwill in the community. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.