Giving to a charity has many benefits for small business, not the least of which are the tax deductions that it offers. A tax deduction reduces the amount of income that is subject to tax and therefore reduces the amount of taxes you owe. A charitable contribution is a great way for businesses to receive tax benefits, but how exactly does it all work?
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Which Charities Qualify for a Tax Deduction?
To keep things simple, any charity designated as a 501(c)3 will qualify. Most charities clearly state their status and tax identification number on their website as well as on any promotional materials.
If you are unsure, simply ask the organization (typically, their Director of Development) to provide proof of their IRS tax determination letter, which they will have at the ready. As there are many worthy 501(c)3 organizations, take a moment to consider which nonprofits align with your organization’s giving goals. What kinds of causes are important to you, your team, and the community that you serve?
What is a Charitable Contribution?
A charitable contribution is defined as a contribution or gift for use of qualified charitable organizations. Donations can include cash, volunteered services, sponsorship of local charity events, or the donation of inventory or services to an organization “operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.” Keep in mind that a transfer of money, goods, or services does not qualify as a charitable contribution for tax purposes if the transferor receives or expects to receive a bargained-for benefit.
What Can You Deduct From Your Contribution?
You can typically deduct the fair market value of your donated item up to 50% of your adjusted gross income (although other limitations may apply.) Claims are itemized and filed on an IRS Schedule A Form 1040.
What Are Examples of Charitable Contributions
Cash contributions are deductible provided that they are not for specified use by an individual or in exchange for a good or service. For example, if you ran a dog-grooming business and made a small contribution to your local chapter of the SPCA, that contribution would be tax-deductible. It would not be tax-deductible if you made a contribution towards the salary of the Executive Director at said chapter or did so in exchange for the SPCA to contract your dog-grooming services in the future.
Unfortunately, your volunteered time and services are not directly tax-deductible, although the expenses incurred to perform the volunteer service are. Let’s say you run a plumbing business and your favorite charity has a pipe burst. Because you’re a good person, you want to fix the issue at no cost to the organization. In this scenario, the time you spend volunteering to fix the pipe is not tax-deductible, but the cost of any replacement pieces, gas to get to and from the charity, etc. all are.
Donated inventory contributions are deductible based on their fair market value (i.e. what the typical market cost for said item would be.) So if you donate a $50 gift certificate to your restaurant to a charity for use at their annual gala silent auction, your deduction would then be $50. Contributions over $500 will require a Form 8283. To determine the value of donated property, refer to the IRS publication found here.
When Must the Contribution Have Been Made?
Contributions must be made during the tax year. So for example, if you want a contribution by your business to count as a charitable contribution for 2015, it must have been made between January 1 and December 31 2015.
What Other Things Should I Consider?
For all contributions, be sure to keep records of what you gave, as well as a copy of receipts from the charity. Most nonprofits will issue a thank you letter that additionally serves as a receipt acknowledging your contribution, saying something along the lines of, “This letter will serve as your receipt. Your generous contribution of $XXX.XX on XX/X/XXXX is fully tax-deductible under IRS regulation. The Example Foundation is a 501(c)(3). Our tax ID is #XX-XXXXXXX. No gift or service was received by you in return for your donation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.