One of the great things about running a business in America is that your business can make tax-deductible donations to your favorite charities. Seventy-six percent of American businesses donate 6% of their profits on average. And, 85% of consumers have a more positive view of companies that donate.
If donations are already at the heart of your business (or will be soon!), you may be eligible for a charitable donation deduction. There is a catch though. You have to be organized if you want to benefit from charity donation tax deductions.
What are charitable donations?
The IRS considers charitable donations as any donation or gift made to a qualified nonprofit organization. Donations can come in many shapes and sizes. A charitable donation deduction includes property and money. You can also donate time, but it’s non-deductible.
When making your deductions, treat property and money differently (more on this below).
Qualified organizations can include nonprofit organizations that are educational, literary, scientific, charitable, or religious. But, this is only a short list. If you want to know if a business is a qualifying nonprofit organization, you can use the IRS’s search tool to find out.
How to make a charitable donation deduction
To deduct a charitable donation, use Schedule A (Form 1040) to itemize your deductions. IRS Publication 526 can help walk you through the finer details.
There are two ways to make a deductible charitable donation: A simple cash donation or a non-cash donation (e.g., clothing, property, or vehicles). There are different processes to document these donations.
Documenting cash donations
Documenting a cash donation is simple. Cash donations can be made with cash, a check, or by using a credit or debit card. Make sure that you have a record of your donation that shows the:
- Name of the charity
- Date of the donation
- Amount of the donation
If your donation is less than $250, a canceled check or a business bank statement will work fine as documentation.
But if your donation is more than $250, you need a written acknowledgment from the qualified charity in addition to a canceled check or bank statement. Written acknowledgments must contain the following:
- Name of the charity
- Amount of the contribution
- A statement that the donation was not in payment of any goods or services provided by the charity
If the charity provided something in return for the contribution, you need the written acknowledgment to include a description and good faith estimate of the goods and services. In addition to this, you may need a statement acknowledging that any goods or services exchanged for your donation consisted entirely of intangible religious benefits (e.g., admission into a religious ceremony or food or drink used in a religious ceremony).
Documenting non-cash donations
Documenting non-cash donations is more complicated than cash donations. One of the reasons for this is there are different requirements for charitable donation deductions of different amounts.
If you donate property, IRS Publication 561 can help assess the value of the donated property, and Publication 8283 has information for non-cash donations over $500.
Deduction of donations less than $250
If your non-cash donation is less than $250, you can only deduct it if you get and keep a receipt from the qualified organization. The receipt must show:
- The name and address of the qualified organization
- The date and location of your donation
- A description of the property. Your description must be detailed enough for anyone to understand the property described
- If your donation is a type of security, include the name of the issuer, the type of the security, and whether it was publicly traded until the date of the contribution. A security is publicly traded if it is listed on a stock exchange that published quotes daily, traded on a national or regional market, or quoted daily in a national newspaper (if it is a share of a mutual fund).
If you can’t get a receipt, a letter or form of written confirmation from the qualified organization will work just as well. The written confirmation must acknowledge receipt of the contribution and contain the information from 1, 2, 3, and 4 above.
It’s possible that when you delivered your donation there was no one there to generate a receipt or written confirmation of your donation. If that’s the case, create and store written records for each item that you donated.
Your written record should include:
- The information from 1, 2, 3, and 4 above
- A description of the donation’s condition if it is clothing or a household item
- The fair market value of the item at the time of donation and how you assessed this value
Deduction of donations greater than $250 and less than $500
If your non-cash donation is more than $250 and less than $500, you must get a contemporaneous written acknowledgment of your donation. For an acknowledgment to be considered contemporaneous, you must receive it before the date you file the return that includes your donation and no later than the due date for filing your return.
The contemporaneous acknowledgment must be written and include:
- A description of the donated property. This description doesn’t necessarily have to describe the value of the item
- Whether you received any goods or services from the qualified organization because of your donation
- If you did receive goods or services, include a description and estimate of their value. The description should also note if the goods or services were an intangible religious benefit (e.g., admission into a religious ceremony). An estimation of the benefit’s value isn’t needed.
Deduction of donations greater than $500 and less than $5,000
If your non-cash donation is more than $500 and less than $5,000, fill out Form 8283 and have a contemporaneous written acknowledgment.
To fill out Form 8283, you need to include:
- Your name and taxpayer identification number
- The name and address of the qualified organization
- The date of your donation
Also include the following information about your donation:
- A description of the donation detailed enough for anyone to understand the item described
- The fair market value of the item at the time of donation and how you assessed this value
- The condition of the donation if it is real or tangible property
- If the donation is tangible personal property, note whether the qualified organization has certified it for a use related to their purpose or function. If you’ve donated to a governmental unit, note whether the personal property has an exclusively public purpose
- If the donation is securities, include the name of the issuer, the type of securities, and whether or not they were publicly traded on the date of your donation
- How you came to own the property (e.g., purchase, gift, or inheritance)
- The approximate date you came to own the property. If it was created or produced by or for you, include the approximate date of its creation or production
- For property held less than 12 months, include the cost or other basis, or any adjustments to the basis. For property held for 12 months or more, include the cost or other basis. This isn’t a requirement for publicly traded securities
Deduction of donations over $5,000
If your non-cash donation is over $5,000 you must have the contemporaneous written acknowledgment described earlier. In addition, you must have a qualified written appraisal of the donated property and complete Form 8283.
A qualified appraisal is not required for:
- Qualified vehicles
- Certain inventory
- Publicly traded securities
- Certain intellectual property
Your completed Form 8283 must include:
- The qualified organization’s taxpayer identification number, as well as their signature and the date it was provided, and the date the organization received the property
- The appraiser’s name, address, taxpayer identification number, and the appraiser declaration (see below), as well as their signature and the date it was provided
- The fair market value on the donated property and the date that value was assessed
- A statement noting whether the donated property was made through a bargain sale. If it was, include the amount of any consideration received for the donated property
Include the following appraiser declaration in the qualified written appraisal:
“I understand that my appraisal will be used in connection with a return or claim for refund. I also understand that, if there is a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund that is based on my appraisal, I may be subject to a penalty under section 6695A of the Internal Revenue Code, as well as other applicable penalties. I affirm that I have not been at any time in the 3-year period ending on the date of the appraisal barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. 330(c).”
For more information, consult IRS Publication 561.
Keep track of your paperwork
It’s clear that paperwork is king when it comes to keeping track of your donations. If you prefer your paperwork in hardcopy, a file folder may work just fine. If you go this route, think about including a spreadsheet or list that allows you to quickly track the names of qualified organizations and the date you made your donation.
Want to save even more time and ensure your paperwork is in one location? Accounting software can help you organize your receipts. If you’re in the market for accounting software, make sure the software has the features you need (e.g., the ability to manage receipts and documents).
To record your donations, make sure that you put the following information in your books:
- The name of the qualified organization
- What you donated (make sure to take detailed notes)
- The item’s fair market value
- The date of your donation
Looking for a better way to handle accounting for your small business? Sign up for Patriot Software today to get a free trial of our easy-to-use accounting software.
This is not intended as legal advice; for more information, please click here.