Do you enjoy contributing to your favorite nonprofit organizations? If your business makes charitable donations, you’re automatically eligible for the joy of giving. And, you may qualify for a tax deduction.
Knowing the ins and outs of small business charitable donations can help you better prepare for tax season. Read on to learn how to navigate through the art of giving in business.
7 Facts about charitable donations
Before diving into our fast facts about charitable contributions, take a look at this suggestion from Stephen Light, Co-owner and Chief Marketing Officer at Nolah Mattress:
My top tip for businesses interested in giving charitable donations is to develop a solid and ongoing relationship with the charities you support. Donations shouldn’t be a once-a-year event, and companies don’t always need to give money to help.
Ready for your business to make a difference? Here are seven fast facts about charitable donations to get you started.
1. A charitable donation is a gift
So, what is charitable giving? According to the IRS, a charitable donation is a gift made to a qualifying nonprofit organization, such as a church or school.
Individuals and businesses make donations without any expectation of getting anything of equal value in return.
2. You can give donations to qualifying nonprofits…
Nonprofit organizations operate to fulfill charitable, educational, religious, or scientific purposes rather than to turn a profit.
In many cases, these organizations have 501(c)(3) status. A 501(c)(3) organization is a nonprofit with tax-exempt status from the IRS.
So, what are the organizations that count as qualifying nonprofit organizations for the purpose of charitable donations?
Some types of qualifying organizations include certain:
- Community chests, corporations, trusts, funds, or foundations
- War veterans’ organizations
- Domestic fraternal societies, orders, and associations operating under the lodge system
- Certain nonprofit cemetery companies or corporations
- The United States, state, or Indian tribal government or any subdivisions
Check out IRS Publication 526 for more information. Still not sure? The IRS has a search tool to help you find eligible organizations.
3. …And these types of contributions are tax deductible
So, are business charitable donations tax deductible? Some (but not all) donations are deductible. A qualified charitable contribution comes in the form of money or property.
You can deduct:
- The money or property you give to a qualifying organization
- Expenses paid for a student living with you, sponsored by a qualified organization
- Out-of-pocket expenses you incur when volunteering at a qualified organization
Donating money to an organization lets them use it as they see fit. Sometimes, an organization can stretch your dollars by purchasing needed items at a deep discount. Cash and other monetary donations are deductible as long as you give them to a qualifying organization and not a specific person.
Want to donate property instead? You can donate a number of things a nonprofit can use or sell to earn more money. Keep in mind that you can only deduct the fair market value of the items you donate. Fair market value is the price an asset would sell for in the current market.
Volunteer your time? Although you can’t deduct the value of your time and services, you can claim a driving-related tax deduction. You can claim a tax deduction for miles directly related to getting to and from the place you volunteer. To claim the deduction, either determine the costs of gas and oil relating to your trips or claim the charity mileage deduction of 14 cents per mile.
4. There are limits to how much you can deduct
Your contribution amount is limited to a percentage of your adjusted gross income (AGI). Here are the set limits:
- 100%
- 60%
- 50%
- 30%
- 20%
The amount you can deduct depends on the type of property you donate, the category of qualifying organization you give it to, and whether you make contributions in different limit categories.
To learn more about charitable donation deduction limits, consult Publication 526.
5. Record donations in your accounting books
If your business makes a donation, keep detailed records. That way, you can refer to your records when filing your business taxes. Be sure to keep these documents around for at least three years in case you face an IRS audit in the future.
Ask the nonprofit for a receipt for your records. And, record the following in your books:
- Who you donated to
- What you donated
- The value of what you donated
- When you donated
When you make a charitable contribution, you are spending money or moving inventory. Make a journal entry reflecting the transaction.
6. Get the donation to the organization by December 31
If you’re counting on claiming a tax deduction for your charitable donation for the current tax year, make sure you get it to the organization before year-end.
Don’t get the donation to your favorite charity in time? Record the donation in your books for the following year. And, you’ll have to wait until the following year to claim the deduction on your return.
7. Claim charitable contributions on your business tax return
How you report and deduct charitable contributions depends on your business structure. Report the contribution on your business tax return:
- Schedule A (Form 1040): Sole proprietors and single-member LLCs
- Schedule K-1 (Form 1065): Partnerships and multi-member LLCs
- Schedule K-1 (Form 1120-S): S Corps
- Form 1120: Corporations
If you make noncash charitable contributions totaling more than $500, file Form 8283, Noncash Charitable Contributions, with your tax return.
If you donate a car, boat, or airplane, the qualifying nonprofit should send you Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes. Attach this form to your tax return to deduct the contribution.
Ready to start making charitable donations? Remember to track them in your books. Try Patriot’s accounting software to streamline the way you track money going out, like donations. Get your free trial today!
This article is updated from its original publication date of 12/11/2015.
This is not intended as legal advice; for more information, please click here.