Every day, small business owners share their success by donating a portion of their revenues to charity. A study from Alignable, a social network for small businesses, shows that 95% of U.S. small business owners plan to make charitable donations this year. The majority (81%) plan to give cash, 75% will provide goods and services and 67% plan to give the gift of time. The tax rules for donating to charity, however, can be complex. Here are some basics:
Deductible donations must be made to an organization that has been approved by the IRS. If you’re unsure of the charity’s status, the IRS provides an Exempt Organization Select Check Tool.
You’ll also need to know where to deduct the donation on your return. Many business owners are surprised to find out that only C Corporations can claim a cash charitable contribution as a business expense. Other entities, including S Corporations, Partnerships, LLCs, and Sole Proprietors, may deduct qualified donations as itemized deductions on Schedule A of the partner or shareholder’s individual tax return. As a result, charitable donations do not reduce self-employment tax and the business owner only realizes a tax benefit for the donation if they have enough deductions to itemize.
If goods or services are received in exchange for the donation, the deduction is reduced by the value of any benefit received. This type of limitation rarely affects individual taxpayers, but businesses often receive recognition, ad space, or some other concession in exchange for donations. Business owners may receive a better tax benefit from buying ad space in an event program or other publication and claiming the deduction as an advertising expense that is 100% deductible and reduces self-employment tax for the owner.
Cash donations, regardless of the amount, require supporting documentation such as a bank statement, canceled check, or credit card statement showing the name of the organization, date, and amount. Cash donations of $250 or more require written acknowledgment from the organization and must specify that no goods or services were received in exchange for the donation.
Obtain any necessary receipts before filing a tax return. The IRS requires written acknowledgment of gifts. If the receipt is provided later, during an audit, the IRS can – and most likely will – deny the deduction.