I write a lot about individuals conducting charitable giving and the various options to do so while living as well as through estate planning means. But, what if you own or run a business and want to make charitable gifts on behalf of the business?
Donations on behalf of a business can be an excellent way to build goodwill, trust, and foster positive public relations. Plus, donations of assets like cash and property can also mean substantial benefits when it comes to filing business taxes.
The good news from the IRS (how often do you hear that?!) is that any business can make contributions to qualified charitable organizations. The caveat is that there are limits on these deductions, and the contributions may only be deductible to the individual owners, not to the business. How the business is categorized is what determines how charitable contributions are deducted and which tax return they are deducted from.
Corporations vs. Sole Proprietorship
Some types of businesses, such as corporations, can deduct allowable charitable contributions directly on their business tax returns. This makes more sense when you consider that the corporation is a separate entity from the owners.
A corporation which files its own tax return can deduct charitable gifts up to 10 percent of its taxable income and is entitled to carryover unused deductions for up to five years.
For a corporation, taxable income for this purpose is calculated without the following:
- The deduction for charitable contributions.
- The dividends-received deduction.
- The deduction allowed under Internal Revenue Code Section 249 [relating to deduction of bond premium on repurchase].
- The domestic production activities deduction.
- Any net operating loss carryback to the tax year.
- Any capital loss carryback to the tax year.
If you are a sole proprietor, charitable donations can also be tax-savvy, but there are differences from filing as a corporation. Your business taxes are filed on Schedule C of your personal Form 1040 and because of this set-up, your business cannot make separate charitable contributions because the only way individuals can deduct these contributions is on Schedule A. Additionally, you must itemize deductions to take them.
This advice also rings true for a single-member limited liability company (LLC), since this category of business files taxes as a sole proprietor.
What qualifies as a donation?
The IRS specifies that both cash and non-cash contributions from businesses are deductible, as well as expenses related to volunteering.
Cash is self-explanatory, and non-cash donations could be property, goods, and inventory. In terms of volunteering, the time and lost wages are not deductible, but volunteer-related expenses for a qualifying charity event or service project are. This includes the travel costs (like gas and mileage) along with any donated supplies.
What does not qualify as a donation?
Say you run Corporation Smile and your employees are given time off to volunteer with the causes of their choice. Could this time volunteered be considered a charitable contribution? In short, no. As stated above, the value of time volunteered on the ground or, say, on a nonprofit’s board of directors does not qualify. Additionally, many times business-based donations are committed in exchange for something of value. Be it a product or service, the tax-deductible amount is the donation’s value minus the value of the good/service exchanged. (Read my primer on the term “quid pro quo” for more on this concept.)
In order to claim the charitable donation deduction, the donee organization must be recognized by the IRS as 501(c)(3) nonprofit. This important distinction is what enables these organizations to receive tax-exempt donations. Beware that gifts and donations to political candidates, parties, or associated organizations are not recognized by the IRS as tax-deductible. The same goes for donations to a specific individual. Be smart and practice due diligence in determining which organizations are qualified by asking to see a charity’s IRS determination letter and/or search for qualifying organizations by using the IRS’ Exempt Organizations Select Check tool.
Record Keeping for the Win
If you own or manage a business you know all too well how important bookkeeping is, especially come tax time. Record retention for charitable contributions is no different. What documentation required depends upon the amount and type of contributions. (Although, my general advice is to keep more paperwork than needed in regard to contributions.)
- Donations valued at less than $250– Retain a receipt issued by the accepting charity. If for some reason you don’t have this, a credit card, bank record, or canceled check will suffice.
- Donations valued at more than $250– Obtain an official gift receipt from the accepting nonprofit.
- Non-cash donations valued at $250 or less– Taxpayers must receive and keep a letter or other type of written communication in the form of a gift receipt from the charitable organization showing: organization’s name, date and location of the contribution, and a reasonably detailed description of the property donated. The gift receipt for a non-cash donation may or may not include a cash value. If not, the donor will need to see that it is appropriately assessed for fair value.
- Non-cash donations valued at greater than $250– The gift acknowledgment from the nonprofit must meet the same requirements for contributions of property valued at less than $250, but must also meet several additional requirements. The written acknowledgment must state whether the qualified organization gave any goods or services in exchange for contribution, and include a description and good-faith estimate of the value of any goods and services given.
So, to summarize, the following details should be retained:
- Name and address of the donee organization;
- Date and location of the contribution;
- Reasonably detailed description of the property;
- Fair market value (FMV) of the property at the time of the contribution and FMV was determined (if the property was appraised, the taxpayer should keep a copy of the signed appraisal);
- Cost or basis of the property, if the taxpayer must reduce its FMV by appreciation—these records should include the amount of the reduction and how it was calculated;
- Total amount the taxpayer is claiming as a deduction for the tax year as a result of the contribution; and
- Terms and/or conditions attached to the contribution.
- Non-cash donation valued at more than $500 and less than $5,000– Taxpayers must fill out IRS Form 8283 when filing taxes. Taxpayers must have the acknowledgment and written records described above, as well as additional information needed including: how the property was acquired (purchase, gift, inheritance, etc.) and the date the property was obtained by the taxpayer.
- Non-cash donation worth more than $5,000– In addition to the requirements listed for the smaller donation amounts, you also must obtain a qualified appraisal of the goods and have the qualified appraiser sign Section B of Form 8283. (Qualified appraisal and qualified appraiser are both vague terms with specific meanings to the IRS. Read more about the specifics of these definitions here.)
The charitable deduction for business can result in significant tax savings, just be certain you do so in the right way to maximize the savings. The nuances of corporate/business giving can be complicated and confusing and every business has a unique situation, so be sure to contact the appropriate professional advisors for specific advice. Questions? Comments? I’d love to discuss further; contact me via email or by phone (515-371-6077).