Donations Corporation Tax: Everything You Need to Know
Understanding donations corporation tax laws can prevent businesses from making illegal donations or donations that aren't tax-deductible.3 min read
2. Donation Limits
3. Benefits of Charitable Donations
4. Charitable Donation Qualifications
Understanding donations corporation tax laws can prevent businesses from making illegal donations or donations that aren't tax-deductible. Only a C corporation can write off its donations to charity on its taxes. An S corporation is allowed to make donations, but it can't declare them as business expenses on its taxes.
Corporation Donation Value
It is easy to write a check to donate to charity, but it is more difficult to value in-kind donations.
Donations given to individuals can never be deducted on taxes. Likewise, volunteering professional services can't be written off. A company that makes a business transaction with a charity can write it off as a business expense but not as a donation. Examples of this include things like purchasing an ad at a nonprofit's event or hiring a nonprofit organization to cater an event. These types of expenses can be written off for all types of businesses, not just C corps.
The basic rule for valuing in-kind donations is that you can deduct a donation equal to the item's purchase price or its market value, but you must use the smaller amount. However, there are numerous exceptions for this rule. For example, donating a boat worth $1,000 to a charity so it can sell it and use the profits allows you to deduct whatever is lower—the fair market value or the sales price. If you donate a more expensive in-kind item, be prepared for additional paperwork to demonstrate that it is valued accurately.
C corps can write off a maximum of 10 percent of their taxable income. Anything more than that amount must be carried forward. For example, a corporation with $50,000 in annual income that donates $7,000 this year and $3,000 the next can only write off $5,000 this year and carry the additional $2,000 forward. The next year the company can deduct its current year donation of $3,000 plus the additional $2,000 from the year before. Contributions can be carried forward for up to five years before they can no longer be deducted.
Items that are donated to organizations to use for treating the sick, needy, and babies receive better tax breaks than other types of donations. If you donate goods to a nonprofit infant clinic that cost you $5,000 and are worth $10,000, you can add half the difference between the cost and value to your deduction. In this example, half the difference is $2,500, so you are allowed to deduct $7,500. These types of in-kind donations are allowed even if they push you above the limit of 10 percent.
Benefits of Charitable Donations
Aside from helping nonprofit organizations, charitable donations are also a great way for a small business to establish goodwill with the community. Charitable donations of time, cash, and inventory can also help corporations with their taxes.
In order to lower its taxable income, a business can donate to charity. The actual value of a cash donation can be deducted, and the fair market value of in-kind items also qualifies as a deduction.
Charitable Donation Qualifications
In order to be tax-deductible, a donation has to be made to a qualifying organization. Charitable organizations must apply for nonprofit status with the IRS. Organizations that work with religion, charity, education, science, or the prevention of cruelty will typically receive the status. Larger organizations, such as United Way and the Red Cross, also qualify for tax-deductible donations. If you are unsure if the charity you are donating to qualifies for tax-deductible donations, ask to see its 501(c)3 paperwork that designates it as a nonprofit organization.
Both cash and non-cash donations are recognized by the IRS as acceptable donations. Non-cash donations can include things like products, goods, or property. Expenses related to volunteering for a charitable event or service project can also be deducted. This doesn't mean you can deduct the value of the time you spent volunteering, but you can deduct the gas and mileage needed to travel to the event and any supplies that were donated.
Charitable donations are often given in exchange for something else. If this is the case, only the amount of the donation above the value of the service or item that was received is considered tax-deductible.
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