Business charitable contributions

Tax benefits

Holguin Danette Crop

Danette Holguin, EA

‘Tis the season for giving and also receiving tax benefits. Maybe community service and giving back is part of the culture at your business. There are several deductions you can take for business charitable contributions during the holidays as well as year-round. Here’s a breakdown of what you can claim.

Donation rules

The rules for making business charitable contributions are similar to those for making personal donations.

Cash donations. First of all, you must make your donation during the tax year to take the deduction. It doesn’t matter what kind of accounting method you use. You must itemize your deductions on Form 1040, Schedule A to claim them. Generally, you can deduct up to 50% of your adjusted gross income (AGI). However, 20% and 30% limitations may apply. Your donation isn’t deductible if it’s set aside for use by a specific person. If you donate more than $250, you will need a receipt from the organization.

Property donations. The deduction amount you can claim for a property donation will be based on the fair market value of the item(s). In most cases, deductions are limited to 50% of your AGI. If you donate less than $250 in property to a charity, you will need to get a receipt. For non-cash donations over $500 in any year, you must file Form 8283 with your tax return, providing information on the donated property. You may also need an appraisal to establish value if your donation is worth more than $5,000.

Regarding cash and property donations, if you received something in return, you can only deduct the amount of your contribution that is over and above the value of the benefit you receive. Also, some charitable contributions may only be deducted by the individual owners and not the business.

Volunteering. Remember, donating your time as a volunteer is NOT deductible, for example, delivering meals for Meals on Wheels, serving on a charitable board, etc. However, you can still deduct certain expenses related to your volunteer work such as deducting the costs for hosting a party or fundraiser for a charitable organization. You can also deduct mileage ($0.14 per mile in 2017) and other travel expenses when working with a charitable organization.

Recordkeeping. It is important that you keep good records to substantiate your charitable deductions in case the IRS decides to take a closer look. The records you need to keep will depend on the type of donation you make, but generally, you will want to hold on to canceled checks; bank, credit union or credit card statements; pay stubs, receipts, etc. If you’re deducting charitable miles or other car related expenses, you will need to keep a written log detailing what you spent.

Qualified charitable organizations. To deduct your business charitable contributions, the organizations you contribute to must be qualified charitable organizations. Check out the IRS website for a list of qualified organizations.

Business structure and reporting

The reporting of the charitable deduction depends on how your business is structured.

Sole proprietorship. If you’re a sole proprietor, charitable contributions are not reported on your “Schedule C, Profit or Loss from Business.” Instead, you’ll report the contribution on “Schedule A, Itemized Deductions.”

Be sure to classify expenses properly to get the maximum deduction. As an illustration, say you take out an ad for your business product in a church bulletin. The cost is an advertising expense, not a charitable donation and you can deduct it directly from your business income.

Pass-through entity. Charitable contributions you make from your partnership or S corporation flow to you as the partner or shareholder in the same way as other income and expense items. Your deduction, which you claim on your personal return, may be limited by your basis in the business. In addition, since you have to itemize to benefit, other limitations may reduce the total amount you can deduct.

Corporation. C corporations can deduct charitable contributions on the corporate federal income tax return. Generally, the deduction is limited to 10% of taxable income. Special rules apply to donations of certain inventory, such as food.

Talk to your tax advisor

Be sure to talk to your professional tax advisor. He or she can help you determine which deductions to claim for your business charitable contributions as well as the tax benefits to help you maximize your savings.

Danette Holguin, EA, Supervisor, specializes in the preparation and review of tax returns for individuals and trusts. You can reach her at DanetteH@hhcpa.com or (480) 839-4900.