As we come to the last quarter of the year, it is an opportune time to review your tax and end-of-year giving plans. Soon comes Give Miami Day, Giving Tuesday, and other giving opportunities before December 31st. But not all donations count the same, and not for all businesses.
First Verify if the Organization You are Donating to is Qualified
Do your research first to ensure that you can claim a tax deduction from the donation you are planning to make. To qualify, the organization must be a 501 (c) (3) non-profit with a religious, charitable, educational, scientific, or literary purpose, or that works to prevent cruelty to children or animals. For more detailed information visit the IRS site.
Your Ability to Claim the Tax Exemption Depends On the Type of Business
If your business is a corporation the charitable donation can be made on the business income tax return, capped at 25% of taxable income.
All other types of businesses pay taxes as pass-through entities. That is, the business income is passed through to the individual owner(s) on their personal tax returns. Their ability to claim a tax deduction from a charitable contribution is possible when the amount of giving and other itemized deductions total more than the personal standard deduction, because your federal income tax will be less if you take the larger of your itemized deductions or your standard deduction. If you are taking the standard deduction instead, you can claim a charity deduction up to $300 per spouse for cash donations.
The standard deduction is $12,000 for singles and $24,000 for married couples who file jointly. So when an individual files his or her tax return, they can either claim the standard deduction, or they can itemize deductions if they total more than the standard amounts noted above.
For example, Ana, the owner of a single-member LLC, files business taxes as part of her personal tax return through a Schedule C. The deduction must be made through her personal part of the return on Schedule A, not the Schedule C form for the business. In this example, if her personal itemized deductions (mortgage interest paid, property taxes paid, charitable contributions, among others) amount to $10,500, Ana will be better off taking the standard deduction and claiming the additional $300 charity donation. And, while an additional charitable contribution of $500 will make a difference to the charitable cause, it does not decrease her taxable income. If her total deductions amount to $12,500, a charitable donation of $500 will lower her taxable income, and thus her tax obligations.
Deductible and Non-Deductible Contributions
Generally, you or your business can deduct cash contributions, gifts of property or equipment (“in-kind” contributions), mileage and other travel expenses incurred in volunteering for a charitable organization, but you are not allowed to deduct the value of your time or the time of your employees while volunteering for a charitable organization
For in-kind contributions, you can deduct business inventory and intellectual property, which are to be valued at fair market price of the day they were donated, and food inventory under special rules.
As you can see, charitable contributions are not always straightforward. While this blog is not meant to be tax advice for you or your business, we do hope it raises awareness of the many nuances in business giving and opportunities that are available to your business. We also encourage you to contact a tax advisor who can help you plan your end-of-year giving and put your generosity to work for both your business and all the local causes you support.