The new tax law has made some changes to your ability to deduct donations to charities on your income tax return beginning in 2018. Corporations and S corporations may still deduct charitable deductions, but other businesses may not.
If your business is a sole proprietorship, partnership, or LLC, your business income is passed through to your personal tax return. The new standard deduction has increased and is now $12,000 for singles, up from $6,350 for 2017, and $24,000 for married couples who file jointly, up from $12,700.
This means that individual taxpayers, including the owners of small businesses that pay business taxes through their personal tax returns must itemize the charitable deductions in the hope of getting above the standard deduction amount.
In addition, the IRS has changed the maximum deduction based on percentage of income. Your deduction for charitable contributions generally can't be more than 60% of your adjusted gross income (AGI), but in some cases, 20%, 30%, or 50% limits may apply.
Charities Must Be Qualified
If you are considering giving a donation to a charity, as an individual or a business, be sure you can claim the deduction. The organization must be qualified by the IRS, either because it is a church or because it applied to the IRS.
You can use this IRS Tax Exempt Organization Search (formerly Select Check) online search tool to help you identify if an organization qualifies.
How Businesses Claim Charitable Deductions
How you deduct charitable contributions depends on your business type:
Corporations and S corporations can make charitable donations on their business income tax returns.
All other businesses pay taxes as pass-through entities. That is, the taxes of the business are passed through to the individual owners on their personal tax returns. Their ability to deduct charitable contributions is limited unless the level of giving is above the standard deduction amount.
The owner of a sole proprietorship, for example, files business taxes as part of the owner's personal tax return. The deduction must be made through the personal part of the return on Schedule A, not the business's Schedule C.
Deductible and Non-Deductible Contributions
You or your business can deduct any of the following:
- Cash contributions
- Gifts of property or equipment (called "in-kind" contributions)
- Mileage and other travel expenses incurred in working for a charitable organization, based on the IRS-designated standard mileage rate for charitable work.
You cannot deduct the value of your time or the time of your employees working as a volunteer for a charitable organization, such as time spent serving on a nonprofit board or for a local United Way organization.
You may be able to deduct cash payments to an organization (charitable or otherwise) if the payments are not charitable contributions or gifts and are directly related to your business.
If the payments are charitable contributions or gifts, you can't deduct them as business expenses.
Deducting Business Property Donations
Your business may be able to deduct certain types of business property, under special rules. You can deduct:
- Business inventory you donate, at the fair market value the day you donated it or its basis at the beginning of the year, whichever is smaller.
- Intellectual property, including patents and trademarks, at the fair market value or the basis, whichever is smaller. You may also be able to deduct a percentage of income from the property, for the life of the property, or 10 years, whichever is earlier.
- Food inventory, for "apparently wholesome food from your trade or business," under special rules.
How Business Types Can Deduct Charitable Contributions
All business types except corporations are subject to the limits on deductions effective for 2018 tax returns and after.
Sole Proprietorships and Single-member LLCs
If you are a sole proprietor, your business taxes are filed on Schedule C of your personal Form 1040. Your business cannot make separate charitable contributions because the only way individuals can deduct these contributions is on Schedule A.
That means you must be able to itemize the deductions to take them. The same is true for a single-member limited liability company since the single-member LLC files taxes as a sole proprietor.
Partnerships and Multiple-Member LLCs
A partnership is a special case because the partnership itself does not pay income taxes. The income and expenses, including deductions for charitable contributions, are passed along to the partners on their individual Schedule K-1 forms each year.
If the partnership makes a charitable contribution, each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has three equal partners and donates a total of $1,500 to charity in a year, the partners can each claim $500 in charitable deductions.
Contributions by partnerships are limited to $250 unless the charitable organization provides a written acknowledgment showing the amount of a cash contribution, the value of the donated property, and an estimated value of goods or services provided in return for the contribution.
Deductions for charitable contributions by members of a multiple-member limited liability company work the same as for a partnership.
An S corporation may deduct charitable contributions, limited to $250 unless the business gets a written acknowledgment from the charitable organization, showing the cash contribution amount or a description of property contributed, with an estimate of the value of goods or services provided in exchange for the contribution.
A corporation may make charitable contributions on its own behalf and take deductions for those contributions. The deductions are included in the corporation's income tax form (IRS Form 1120). There may be limitations to deductions.
If you personally have made noncash contributions over $500 in any year, you must file Form 8283 with your tax return, providing information on the donated property.
Disclaimer: This article is intended to provide general information about a specific tax subject. Nothing in this article or other articles from this contributor should be considered tax or legal advice. If you have questions about the deductibility of charitable contributions, check with a tax professional.