How to Deduct Charitable Donations
You're probably aware that you can make a donation to charity and deduct it from your taxes. You may not know that your business can make tax-deductible contributions, too. But the ways these are recorded on tax forms differ.
The New Tax Law
First, the new tax law may have a big impact on charitable giving, albeit unintentionally.
The 2017 tax reform law dramatically raises the standard deduction for 2018 and beyond. The new standard deduction is $12,000 for singles, up from $6,350 for 2017, and $24,000 for married couples who file jointly, up from $12,700.
The increase in the standard deduction was intended to simplify tax return filing. But it also means that individual taxpayers, including the owners of businesses that are not corporations, have less incentive to give to charities. If you want to give to charity and get a deduction, you must itemize the charitable deductions in the hope of getting above the standard deduction amount. Some taxpayers may not want that extra bother.
If you choose to itemize, how your charitable contributions are deducted and which tax return they are deducted from depends on the type of organization.
How Businesses Claim Deductions
All types of businesses except corporations pay taxes as pass-through entities. That is, the taxes of the business are passed through to the individual owners.
The owner of a sole proprietorship, for example, files business taxes as part of a personal tax return. The deduction must be made through the personal part of the return, not the business's Schedule C.
There are other rules for qualifying for a charitable deduction.
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.
This IRS Tax Exempt Organization Search (formerly Select Check) online search tool will help you identify if an organization qualifies.
Deductible and Not Deductible
You or your business can deduct any of the following:
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.
The IRS says:
Cash payments to an organization, charitable or otherwise, may be deductible as business expenses 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 cannot deduct them as business expenses. However, corporations (other than S corporations) can deduct charitable contributions on their [personal] income tax returns, subject to limitations.... Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040) [on their personal tax return].
(Source: IRS Publication 535: Business Expenses)
Sole Proprietorship Contributions
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.
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.
So, 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.
Because the donation of cash or property reduces the value of the partnership, each donating partner must reduce his or her partnership interest by the value of the donation. For example, if a partnership donates office furniture to a charity, the value of that furniture is no longer owned by the partnership, so it must be taken off the books, which reduces the total value of the partnership.
Deductions for charitable contributions by members of a multiple-member limited liability company work the same as for a partnership.
S Corporation Contributions
Since a corporation is a separate entity from the owners, the corporation can make charitable contributions on its own behalf and take deductions for those contributions. The deductions are included on the corporation's income tax form (IRS Form 1120).
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.