Can My Business Deduct Charitable Donations?
Any business can make contributions to charitable organizations but there may be limits on these deductions, and the contributions may only be deductible to the individual owners, not to the business.
New Tax Law and Charitable Giving
The 2017 tax reform law has changed the landscape of charitable giving. The standard deduction has almost doubled 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).
While the increase in the standard deduction is supposed to simplify tax return filing, it also means that individual taxpayers, including owners of businesses that are not corporations, have less incentive to give to charities. If you want to give and get a deduction, you must itemize all charitable deductions, in the hope of getting above the standard deduction amount.
How these contributions are deducted and which tax return they are deducted from depends on the type of organization.
How Do Different Types of Businesses Claim Deductions for Charity?
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. A sole proprietorship, for example, files business taxes as part of a personal tax return, and the deduction must be made through the personal part of the return, not the business' Schedule C (tax filing section).
This article details the regulations for deducting charitable contributions for each type of business (see below). The article also explains what types of deductions are allowed and the limits.
Charitable Organizations Must Be Qualified
First, if you are considering giving a donation to a charity, be sure you can claim the deduction.
In order for you or your business to be able to claim a deduction for a charitable organization, the organization must be qualified by the IRS. To be qualified, an organization must meet specific requirements and meet IRS criteria. Use this IRS Exempt Organizations Select Check online search tool to see if an organization qualifies.
What Is Deductible and What Is Not Deductible
You or your business can deduct:
- Cash contributions
- Gifts of property or equipment (called "in-kind" contributions)
- Mileage and other travel expenses incurred in relation to working for a charitable organization, based on the IRS-designated standard mileage rate for charitable work.
But, you cannot deduct your time or the time of your employees working as a volunteer for a charitable organization, such as time spent serving on a non-profit board or for a local United Way.
Limitations on Charitable Donations
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)
See this IRS article on Charitable Contribution Deductions for more information.
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, and you must be able to itemize deductions to take them. The same would be 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 each year.
So, if the partnership makes a charitable contribution, each partner takes a percentage share of the deduction on his/her personal tax return. For example, if the partnership has three equal partners and it donates a total of $1,500 to charity in a year, the partners each can claim $500 of 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).
Special Note on Non-cash Contributions
If you personally have made non-cash 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 you with general information to get you started learning 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 your tax professional.