Tax Implications of Small Business Donations to Charity

Learn about the implications of donating to charity through a business, and discover what will benefit the charity and your small business.

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
  • Watercraft
  • 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.

How to Donate Stock to Charities

If you are looking for ways to reduce your tax liability, you may want to explore the benefits of donating stocks to charity. This can eliminate capital gains taxes and earn you a charitable tax credit. This form of donation also helps to put more money in the pocket of the charity.

Eliminates Capital Gains

If you have a stock worth $5,000 and you sell it, you have to report any capital gains that you earn on the sale. For instance, if you bought the stock for $2,000 and sold it for $5,000, you have $3,000 in capital gains.

The Canada Revenue Agency (CRA) and Revenu Québec (if you are in Québec), requires taxpayers to include 50% of capital gains on their tax return and pay tax on that amount. In this situation, you have to report $1,500 as income and pay tax accordingly.

That said, if you donate those same stocks to charity, you don’t have to report or pay tax on the capital gains. The CRA has a 0% inclusion rate for stocks donated to eligible charities, which means no tax liability for the capital gains on such stocks.

If you give the stocks to a family member or to a non-profit that doesn’t qualify for the charitable tax donation, they still must report the capital gains as if you sold the stock for fair market value. As a result, giving to registered charities offers benefits that giving stocks to friends, family, or other organizations does not.

Provides More Money to the Charity

Additionally, when you take this approach, it also generates more money for the charity. Imagine that you want to sell stocks and give the proceeds to charity.

To continue with the above example, imagine that you sell the stock for $5,000, reports $1,500 as a capital gain, and pays $500 in federal income tax, based on a tax rate of 33%. Once you subtract the tax bill of $500, you will only have $4,500 to give to the charity.

In contrast, if you give the stocks to the charity, the charity can sell the stocks for their fair market value of $5,000. The charity doesn’t have to worry about any capital gains, and all that money goes straight into its coffers.

Creates a Larger Charitable Tax Deduction

On top of those key advantages, your client also receives a larger charitable donation tax credit. As of 2017, the CRA offers a federal tax credit of 15 percent on the first $200 donated and a 29% credit on donations over that amount.

Continuing with the $5,000 worth of stock example, you earns a credit worth $1422 toward lowering their tax bill. Note that this tax credit is a non-refundable credit, meaning it can’t be used to reduce total tax liability below zero

In contrast, if your client sold the stock and made a donation worth $4,500, their tax credit would only be $1248. When you compound that with your capital gains tax, you stand to lose hundreds of dollars by paying more in taxes. This doesn’t even take into account the provincial tax credits for charitable donations that can help you save even more money.

In Québec, Revenu Québec offers a tax credit rate of 20% for the first $200 of the donation and 24% or 25.75% for the remainder.

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:

  1. 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.
  2. 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.
  3. 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.

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