How and when you can deduct charitable donations is widely misunderstood.
TWO important thing to understand is..
1. CHARITABLE DONATIONS ARE NOT BUSINESS EXPENSES.
2. CHARITABLE DONATIONS MUST BE MADE TO QUALIFIED DESIGNATED NON PROFIT ORGANIZATIONS.
This blog post will walk you through all of these pieces.
Who can deduct donations?
First, you must itemize deductions to gain the tax benefit of a donation.
Charitable donations are listed on Schedule A of your personal tax return and flow through to your 1040.
2018 Tax law changes doubled the standard deduction so now you would need to donate a significant amount to a qualified organization to make it worth it. You can learn all about the standard deduction versus itemized deductions here.
Sole Proprietor/Single Member LLC
If your business is a sole proprietorship or single-member LLC, your business net income passes through to your personal tax return. This means that you cannot make donations through your business. If you already have, that’s ok you would just categorize them as owner draws, and then you would need to account for those donations on your personal tax return as an itemized deduction on your Schedule A.
Partnership & S-Corporation Donations
Partnerships & S-Corporation can make charitable donations with business funds. However, these donations are not counted as an expense and do not reduce the net income of the business.
These donations flow through to the partner or shareholders K-1, which, similarly to a sole proprietorship or single-member LLC, flows through to their personal return. They still have to itemize on their personal tax return to gain the tax benefit. But, they can pay for donations from business cash, it just does not count as any type of expense when taxes are filed and dow not lower taxable income..
What IS Considered a donation
- Cash contributions
- Gifts of property or equipment
- Mileage used while working for a charitable organization – The IRS has a standard mileage rate for charitable work.
What IS NOT considered a donation
You cannot deduct the value of your time or your employee’s time.
You cannot decuct a donations if you received any goods, advertising, or gifts in exchange
(for example a fundraising dinner where you purchase a ticket)
How much can you deduct?
In general, you can deduct up to 60% of your adjusted gross income, often referred to as AGI. Still, you may be limited to 20%, 30%, or 50% depending on the type of contribution and the organization (contributions to certain private foundations, veteran organizations, fraternal societies, and cemetery organizations come with a lower limit, for instance). IRS Publication 526 has the details.
Charities must be qualified
Not all donations are tax-deductible.
In order to deduct a donation, it must be to a charity that has been designated by the IRS as a 501(c)3, otherwise known as a non-profit. This means this organization is exempt from taxes. So any money you contribute to them is not taxable to them and is deductible to you.
The IRS has an online database where you can look up any organization to see if they are qualified – Click here to check it out.
Crowd Funding – Beware!
Something to be aware of when donating through crowdfunding sites like GoFundMe, you still need to check through the IRS Tax Exempt Organization Search to see if whoever is running the campaign qualifies as a tax-exempt organization.
In most cases, this type of donation is to a personal campaign that is not tax-deductible so be careful.
You must keep a record of every donation you deduct. IRS Approved documentation includes:
- Bank Statements
- Credit card statements
- Detailed letter from the organization.
Cash or Property OVER $250
The IRS requires you to get a written letter of acknowledgment from the charity. The letter must list the amount donated, whether you received anything from the charity in exchange for your donation, and an estimate of the value of those goods and services. You must receive the letter of acknowledgment by the date you file your taxes.
Cash or Property OVER $500
The IRS requires you to fill out form 8283 and submit with your tax return.
Business donations or advertising ?
Now, that you understand charitable donations it’s important to look at your business expenses and figure out if something is truly a donation or if it can be deducted another way.
For example, if you sponsor an event(let’s say a 5K)raising money for an organization, even though it may be a tax-deductible organization, if you receive something in return (in this case your business logo on a banner at the event) you can simply deduct the entire cost on your business books as advertising.
Hopefully, you now have a much better understanding of what counts as a charitable donation and what can be classified as a different type of deduction for your business. If you have any other questions regarding charitable donations or just want more bookkeeping and tax-related tips as you run your creative business, head on over to my free community group on Facebook. I go live every week answering any question you’ve got!