Businesses begin to consider ways to cut their taxes toward the end of the calendar year and many businesses start looking at assets that have been sitting around gathering dust for months. These assets might include:
- Out-of-date office equipment or furniture
- Obsolete (or not so obsolete) machinery
- Vehicles that are no longer being used
If you've been thinking about donating some equipment or furniture to charity, that's great, but make sure you maximize the tax benefits of a charitable donation before you start turning over property.
Before You Consider a Business Donation
If you are wondering what type of tax break your donation will bring your business, there are some things you need to know:
- If your business is a corporation, the business can take a tax deduction for any donations, whether they are assets, cash, or investments.
- If your business is not a corporation, the business can't make a deductible donation. Any deduction for donations must be made through the personal tax returns of the owners, on Schedule A.
- The 2017 Tax Reform Act made significant changes to the ability to deduct charitable contributions.
Check with your tax professional to learn how your proposed donation will affect your business or personal tax situation.
Considering Where to Donate
First look at whether you can take a tax deduction for giving to your charity of choice. You must donate to a charity that is approved by the Internal Revenue Service as a non-profit to claim a deduction. The IRS Exempt Organization Select Check provides a complete list of approved charities, as well as a search tool.
Before you make a decision as to whether to donate an asset or to sell it and donate the cash, you must also:
- Determine the original value of the asset when you purchased it, including the cost of shipping and setting it up.
- Estimate the asset's current fair market value.
You should keep accurate and complete records on business assets so you can substantiate the original value.
Appraising Business Property
You must be able to demonstrate that the fair market value is accurate for donations of business assets or property with a value greater than $250. This may require that you get an appraisal from an independent appraiser. Read more about tax deductions for charitable donations.
Consult Your Tax Adviser
When you have determined the original value and the current fair market value of your donation, consider consulting your tax adviser before making a decision about whether to donate the asset or the cash proceeds from its sale. Several variables may affect your decision, including potential capital gains and the type of business you own. Some general guidelines can help you make the decision:
- Consider whether the asset has increased (appreciated) or decreased (depreciated) in value.
- If it has appreciated, you'll probably realize larger tax savings by donating the asset directly to the charity. If you sell the asset and give the proceeds to charity, the increase in value will likely produce a capital gain which will result in increased taxes for you or your business. The charity will probably be able to sell or auction off the asset for a higher price, too.
- If the asset has depreciated, it is usually better to sell the asset and take the loss, then donate the proceeds to a charity. If you donate the depreciated asset directly, you'll only receive a deduction for the decrease in value.
- If you're donating inventory, you must first establish its cost basis using LIFO, FIFO or other means. You can deduct the fair market value or the tax basis, whichever is less.
- If you're donating property with a mortgage against it, you must reduce the fair market value by the value of any interest you paid or will pay after the contribution. You can't claim the interest deduction and a charitable deduction on the same amount.
Documenting the Gift
You will need a letter from the charity that acknowledges the donation whether you donate cash or assets. The letter should include the exact amount donated for cash donations. The charity does not estimate value for property or asset donations. You must be able to prove value with an appraisal or some other independent assessment.
NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.