Key Takeaways:

  • Businesses can make charitable donations, but tax deductions vary based on business type.
  • Only certain contributions to IRS-recognized 501(c)(3) charities are deductible.
  • Partnerships and sole proprietorships must pass deductions to individual owners, while C corporations can deduct donations directly.
  • Deductible contributions include cash, property, and some volunteer expenses, but not time or political donations.
  • To ensure eligibility for deductions, verify a charity’s tax-exempt status and document all donations.
  • Mileage and necessary expenses for charitable service may be deductible if directly related to the business.

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.

Benefits of Business Donations to Charity

Charitable donations can provide more than tax benefits. They enhance a business's reputation and foster goodwill in the community, potentially attracting customers who value social responsibility. Companies that actively support charities often experience improved customer loyalty and employee morale. However, it’s essential to ensure the donation aligns with the company’s values and objectives for maximum impact. Additionally, certain sponsorships and event contributions might indirectly boost brand visibility, giving dual benefits of community engagement and marketing.

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.

Eligibility and Documentation Requirements for Deductible Donations

To qualify as deductible, contributions must go to IRS-recognized charities, specifically those with 501(c)(3) status. Businesses should request a copy of the organization’s IRS determination letter or use the IRS online tool for verification. Proper documentation is critical; for cash donations, retain receipts or bank records. For non-cash donations over $500, additional documentation (e.g., IRS Form 8283) is required, and appraisals may be necessary for items over $5,000. Businesses should also maintain records of the donation's purpose, date, and fair market value to substantiate any deductions claimed.

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.

Deduction Limitations and Carryover Rules

Business donations to charity are subject to certain limits. C corporations may deduct up to 10% of their taxable income for qualifying donations, while individual owners of pass-through entities like sole proprietorships and partnerships are typically subject to the individual limit of up to 60% of adjusted gross income (AGI) for cash donations. Unused deductions can be carried forward for up to five years, providing flexibility to maximize deduction benefits. These carryovers must be applied against the same type of contribution in future years (e.g., cash or non-cash).

Corporation Contributions

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.

Special Considerations for S Corporations

S corporations, like partnerships, pass charitable contribution deductions to shareholders. Shareholders report their share of donations on their individual returns, usually via Schedule K-1. The value of the donation reduces each shareholder's basis in the S corporation. For S corporations considering larger donations, understanding how deductions impact shareholder basis is essential to ensure tax benefits are fully realized.

If you need help with determining business deductions for charitable contributions, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.