Business Deductions for Charitable Contributions
Business deductions for charitable contributions may be limited, and may only be deductible for the individual owners rather than the business itself.3 min read
Business deductions for charitable contributions may be limited, and the deductions may only be deductible for the individual owners rather than the business itself. Every business type, with the exception of traditional C corporations, pays taxes as a "pass-through" entity. This means the business's taxes are passed along to the company's individual owners.
Giving to non-profit organizations and charities can help build goodwill within the community, which could help your grow business. Charitable donations of cash, time, and property can provide some benefits when filing your business taxes, as some contributions are tax-deductible.
Can a Business Deduct Charitable Donations?
Any cash payments made to an organization, charitable or not, may be deducted as a business expense when the payments are not gifts or charitable contributions, and they must be directly related to your business. In many cases, any payments made as gifts or charitable contributions cannot be deducted as business expenses.
It's important to start by verifying whether you can claim a deduction for a donation to a charity. In order to claim as a deduction, the charitable organization must be recognized by the IRS. To qualify, an organization has to meet IRS criteria and specific requirements. Typically, only 501(c)(3) organizations qualify, and a donation to an individual person or any other 501(c) designed non-profit is typically not eligible for a deduction.
You can determine whether an organization qualifies by asking to see the business's letter from the IRS that designates them as a tax-exempt organization. You can also search using the IRS Exempt Organizations Select Check online tool to verify whether it qualifies. It's best to seek assistance from a tax professional to verify that you are adhering to applicable tax rules on charitable donations.
What Is and Isn't Deductible
The IRS allows for both cash and non-cash donations, like goods, inventory, and property from businesses. Cash and check donations must have proof of the donation to be deductible.
You may be able to deduct expenses for volunteering at a qualified service project or charitable event. It doesn't include the value of your time, but it will allow you to recoup the gas and mileage necessary to attend an event and any supplies you donated to the particular cause. There are some things you need to know about mileage deductions:
- You can only deduct mileage if you were not traveling to the destination for any other reason
- In 2017, the rate for mileage deductions related to service of charitable organizations is 14 cents per mile.
It's important to familiarize yourself with things that are not deductible:
- You cannot deduct your time or the time of your employees who are volunteering for a charitable organization.
- Gifts and/or donations to political parties, organizations, candidates, or particular individuals, are not recognized as tax-deductible by the IRS.
- If a donation is made in exchange for something of value, you can only deduct whatever amount exceeds the service or value of the goods received.
Contributions by Sole Proprietorships and Partnerships
Sole proprietors file business taxes on their Schedule C of IRS Form 1040. This means your business cannot deduct charitable contributions because individuals can only deduct contributions on Schedule A. In order to take a deduction, you must be able to itemize deductions. The IRS views this as a personal expense paid using business funds. The same would apply for a single-member LLC, as a single-member limited liability company would file taxes as a sole proprietorship.
Partnerships are unique because a partnership doesn't pay income tax itself. All income and expenses, including deductions for charitable contributions, are passed along to the individual partners who report them on their Schedule K-1 each tax year. If a partnership makes any charitable contributions, each partner will take a percentage share of the deduction on their personal tax returns. Remember that any donation of cash or property reduces the value of the partnership and therefore each donating partner must reduce their partnership interest by the donation value.
Because corporations are separate entities, they can make charitable contributions on their own behalf and take the applicable deductions for these contributions. They would be included on the corporation's form IRS Form 1120. S corporations operate like a partnership. Shareholders receive Schedule K-1 that show their portion of any charitable contributions made by the corporation.
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