How to Deduct Charitable Donations
The new tax law, the Tax Cuts and Jobs Act of 2017, has made some changes to deductions on Schedule A, reducing your ability to deduct donations to charities on your income tax return. Your business may be able to deduct charitable giving, depending on your business type.
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.
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.
IRS. "Instructions for Schedule A." Page 1. Accessed Sept. 15, 2019.
First, 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.
You can use this IRS Tax Exempt Organization Search (formerly Select Check) online search tool to help you identify if an organization qualifies.
IRS. "Publication 526: Charitable Contributions." Page 2. Accessed Sept. 15, 2019.
How Businesses Claim Deductions
How you deduct charitable contributions depends on your business type:
Corporations (not S corporations) can make charitable donations on their 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.
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, not the business's Schedule C.
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 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.
IRS. "Publication 535: Business Expenses." Page 46. Accessed Sept. 15, 2019
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. IRS Publication 526. "Worksheet - Donations of Food Inventory." page 10. Accessed Sept. 15, 2019.
IRS. "Publication 526: Charitable Contributions." Page 10. Accessed Sept. 15, 2019.
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.
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.
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.
IRS. "About Form 8283, Noncash Charitable Contributions." Accessed Sept. 15, 2019.
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.