For small businesses, donating to a charity has many benefits, especially if you donate locally. It helps you connect and show gratitude for your community. It can give your business good PR by letting your community know what you value and support. It may also provide you with the opportunity to write off the donation as a charitable contribution, giving you a tax break.
If you’d like to claim a charitable donation deduction, here are the things that you will need to do:
Determine If the Organization is Eligible
In order to receive a tax deduction for a charitable contribution, the organization needs to be tax-exempt. Some examples of qualified organizations include:
Churches and religious organizations
Nonprofit charitable organizations (American Red Cross, United Way, etc.)
Nonprofit education organizations (the Boy & Girl Scouts, colleges, museums, etc.)
Nonprofit hospitals and medical research centers
Nonprofit volunteer fire companies
To see if the organization you donate to qualifies you for a tax deduction, you can either ask the organization or use the IRS Tax Exempt Organization Search tool. It’s good to note that contributions to individuals are not deductible.
Determine the Value of Non-Cash Items
If you donate non-cash items such as inventory or intellectual property, you will need to determine the Fair Market Value of it. The IRS defines this as “the price that property would sell for on the open market.” IRS Publication 561 provides information on how to determine the value of the donated property, taking factors such as cost or selling price, sales of comparable properties, replacement costs, and opinions of experts into account.
Volunteer hours are not eligible for deductions. However, expenses related to volunteering such as parking, travel, supplies, etc. can be deducted.
Record Your Contribution
Records of the donation will need to include information such as the organization you donated to, the date of the donation, and the amount or value of the donation. Documents such as checks, bank statements, and receipts are good to keep since these will most likely include this information. For non-cash items, you will need to note the condition.
Depending on the contribution and its value, you may need to provide more information. For example:
Donations valued at $250 or more will need a written acknowledgment from the organization
Non-cash items valued over $500 will require a Form 8283
Items valued over $5,000 will need a written appraisal
IRS Publication 526 can help you determine which records you need to keep based on your contribution.
Claim Your Deduction
Depending on your business type, the way you claim a deduction will differ.
Corporations (excluding S-corps) are the only entity that will include the deduction on their business income tax return.
If you’re a Sole Proprietor or Single-Member LLC, you will itemize the charitable contribution under Gifts to Charity using a Schedule A on your individual federal tax return.
For Partnerships, S Corporations, and LLCs with multiple members, charitable contributions will be filed on each partner’s Schedule K-1 Form. The percentage of the contribution on each partner’s form will match the percent of equity they have in the company. For example, if you have two equal partners, they will each claim 50% of the contribution value.
There are certain limitations on how much money you can deduct. The IRS website states that “generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases.” Deduction amounts are based on where your donation is going and what type of contribution you make.
'Tis the Season
Giving back to your community shows you care about more than just making a profit but also making a positive impact. We hope that this helped answer some of your questions about charitable contributions and maybe even encouraged you to donate to a charity that is important to you.
Additional Resources
If you have additional questions about which organizations and contributions are eligible, how to determine Fair Market Value, and which records you should keep for specific contributions, check out the resources below: