By making a charitable contribution, your business can help people in need while potentially reducing your tax burden.
However, there are rules and restrictions you should consider before contributing your money to a cause.
From your corporate structure to the nature of your donation, here’s a primer on what you should know about tax-deductible charitable contributions.
Before You Donate, Check Your Charities
If you’re looking to deduct a charitable donation, investigate your charity before you write a check. For your donation to be deductible, the charitable organization has to be registered as a 501(c)(3), says Bonnie Lee of Fox Business.
To check if your favorite charity qualifies, you can search for its tax-exempt status on the Internal Revenue Service website. Once you’ve donated, make sure to hold on to any correspondence you receive from your charity of choice.
A canceled check isn’t sufficient documentation for the IRS, so your deduction may be denied if you can’t produce these papers. Have them on hand before you submit your tax return, since you won’t be able to receive it in the event of an IRS audit.
Related: Charitable Giving: Make a Big Impact on a Small Budget
When Your Business Donates, Don’t Receive Anything in Return
When your business donates to charity, make sure that your company isn’t receiving services or goods in exchange for your contributions.
For example, if you donate funds to a cause, the recipient charity should not display an ad for your business as a form of acknowledgment. According to Lee, this would change your donation into an advertising expense.
Make Sure to Itemize Your Qualifying Tax Deductions
To enjoy tax benefits from your charitable donations, you have to itemize your qualifying deductions on the Schedule A portion of your taxes. Since a donation isn’t a business expense, you can’t deduct it on your Schedule C form.
Be aware that any non-itemized donations won’t reduce your self-employment tax. Instead, the IRS classes your non-itemized contribution as a personal expense funded by your business.
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Know What Counts as a Charitable Contribution
You can deduct cash, mileage, supplies, equipment and property that you’ve contributed to a qualified charity. However, there are some specific rules to keep in mind, explains Jean Murray, a contributor to The Balance Small Business.
According to Murray, when donating equipment, you can deduct it based on how it was valued at the start of the year or its fair market value on the day you donated it, whichever figure is lower. You can even donate intellectual property — just deduct a percentage of its income for 10 years or until your patent expires, whichever arrives first.
Murray also explains that you can also deduct food donations, but check with the IRS or a tax expert to make sure your products qualify.
On the other hand, you can’t deduct the time you or your employees have spent providing services for charity. Further, you cannot deduct gifts to individuals or contributions to political candidates and organizations.
Your Business Structure Matters When it Comes to Charity Contributions
If you have a multiple-member LLC or a partnership, each member will have to deduct their contribution through their respective Schedule K-1 forms. This is typically a percentage of the deduction.
For instance, if an equal two-member partnership has $1,000 worth of donations, each partner could deduct $500. Contributing partners then must reduce their interest in the partnership by the amount of the donation. Furthermore, the donation will reduce the company’s overall value since it will no longer own that cash or property.
Learn More About Tax-Deductible Charitable Donations for Your Business
Charitable donations can allow your business to give back to your local community while also reducing your tax burden. If you’d like to learn more about making tax-deductible charitable donations, consult your business partner, financial advisor or a tax expert.
At Minster Bank, we love helping businesses grow. Consult Minster Bank’s team of financial experts for advice on your small business. Plus, we’re only a phone call away if you want to talk with a real, local person.
This blog was updated on Dec. 17, 2021.
Published by Minster Bank
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