What You Need to Know About Deducting Charitable Donations
A tax expert shares guidelines for making your contributions work for you.
It’s been said that the more you give, the more you get. For small business owners, the ability to claim tax deductions is one benefit of giving back to their communities. Even if you have no interest in being recognized for your business’s good deeds, there is no reason you shouldn’t take advantage of all of the tax breaks available to you.
Joshua Zimmelman, owner of Valley Stream New York accounting firm Westwood Tax & Consulting, has been helping entrepreneurs smartly satisfy their tax obligations for years. While you should consult with an accountant to assess your company’s unique situation, we asked Zimmelman to share some guidelines on how small business owners can make sure their charitable donations work for them.
How substantial can charitable deductions be for small business owners?
For most organizations, you can deduct up to 50 percent of your adjusted gross income for the year. However certain organizations and donations have other limits.
What are some examples of what is deductible?
- Cash donations to qualified 501(c)(3) organizations (and other tax-exempt eligible organizations) are deductible. These may include:
- Non-profit charitable organizations.
- Non-profit educational organizations and daycare centers.
- Non-profit hospitals and medical research organizations.
- Non-profit volunteer fire companies.
- Religious organizations.
- Civil defense organizations.
- Utility company emergency energy programs.
- Sponsorship of charity events are deductible.
- Non-cash donations (like goods or property) are deductible but you will need a qualified appraisal of non-cash property worth over $5000.
- Out-of-pocket expenses incurred while volunteering are deductible.
- If you sell property for less than fair market value (a “bargain sale”) to a qualified organization, you can deduct part of the item’s value. (Note: the amount you did receive for the item will be considered a taxable gain.)
What types of products and services are not deductible?
- Contributions to nonqualified organizations are not deductible.
- Certain state bar associations that have private purposes (e.g., promoting the professional interests of its members).
- Business leagues, organizations, or chambers of commerce.
- Country clubs, social clubs, civic leagues, and associations.
- Homeowners associations and labor unions.
- Political organizations and candidates.
- Foreign organizations (other than certain Canadian, Mexican, or Israeli organizations.)
- Contributions to qualified organizations that are intended to go to a foreign organization are not deductible (despite the organization being otherwise qualified).
- Contributions to individuals are not deductible.
- You can’t deduct payments made to an organization that are considered direct business expenses. You can deduct them as business expenses, but not as charitable donations.
- You can’t deduct donations that your business receives a direct financial or economic benefit from (e.g., paying an organization to lobby on issues that are of interest to your company).
- If you received merchandise, goods, or services from your contribution (e.g., admission to a charity event or an advertisement in the organization’s journal) you can’t deduct the entire payment. You can only deduct the amount that exceeds the fair market value of the item or service you receive.
- You can’t deduct the value of time spent volunteering. You can only deduct travel expenses if the volunteering was the sole purpose of the trip.
- You can’t deduct appraisal fees incurred determining the value of non-cash donations.
- You can’t deduct non-cash donations of clothing or household items that aren’t in good condition (unless you have a qualified appraisal of the items for $500 or higher).
What kinds of records must small business owners keep in order to get their deductions?
With every donation, you should ask for an official letter from the organization stating that they received a contribution from your company. For donations over $250, the letter should also state whether or not you received goods or services in exchange for your donation. For non-cash donations worth over $5,000, you should get a qualified appraisal. Also save any proof of donation (canceled checks, bank or credit card statements, payroll deduction records) and receipts and categorized records of expenses incurred while volunteering (supplies, mileage/travel costs).
While there are countless ways to give, Zimmelman suggests that small business owners do their research before donating to any charity. “Make sure that they are certified as tax-exempt by the IRS,” he says. You may also want to look the organization up using the Better Business Bureau Charities and Donors search tool.
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