I’m a huge fan of charitable giving year round, but especially during the month of December. Once the month kicks off with #GivingTuesday, businesses and individuals around the world begin integrating giving back as a great way to observe the holidays throughout the month.
This is also where your business’s tax strategy and its responsibility to give back to the community can intersect. There are dozens of tax deductions small businesses can use to lower their taxable income, but giving back to charities is the only strategy that gives your business a way to create goodwill on any scale, from your local community or nation-wide.
Donating to your favorite nonprofit is an opportunity to claim tax deductions before the ball drops, and for small businesses, it can also be a great way to boost employee morale and shape your company culture. But before you let those good vibes sink in, remember to cover your bases and ensure you check off a few things you need to claim your charitable tax deduction.
Making what your small business donates count for tax deductions
The money, supplies, and property your company donates can all count toward your deductible expenses to help lower your taxable income, as long as you keep these things in mind:
1. You can't count what you don't record
You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.) If you’re audited, you’ll need evidence that you earned the deductions you claimed and the IRS will want your bank record, payroll deduction records, or a written communication with the name of the organization including the date and amount contributed. You can even use your phone bill if you make a donation via text message.
2. You can’t wipe out your entire income
Before you make your donation, know your limits. This changes based on your type of entity. If you’re incorporated as a C corporation, your business can only deduct 10% of their taxable income in donations each year. However, if your C corp does donate an amount that is more than 10% of your net income, you can carry it over to deduct for the next year.
On the other hand, pass-through entities such as sole proprietorships, partnerships, LLCs, and S corps do not pay taxes as a single entity. Instead, each owner, partner, or shareholder pays taxes separately as an individual who can donate up to 50% of their adjusted gross income in cash donations.
3. You can’t deduct your time
Group volunteer days at a soup kitchen or food bank in your local community are a great way to create bonds, a sense of purpose, and loyalty. But unfortunately, the IRS won’t allow you to deduct your time or services provided. On a related note, you also can’t deduct the blood that you donate.
If you want to instill your bond with a cause try doubling up. Hold your group volunteer day with the organization you choose, but also look for opportunities to donate deductible items (cash, stock, and property, including real estate, vehicles, clothing, and appliances). This gives you even more ways to involve your employees who want to contribute their time or items of their own, or both.
4. You can’t donate to just any organization
While there are thousands of charities that would be happy to put your donations to good use, some specific groups don’t qualify:
Who doesn’t? Even though they may operate as 501(c)(3)s and be considered non-profit organizations, you can not make a financial contribution to lobbying groups, labor unions, chambers of commerce, civic or social clubs, homeowners’ associations, and political candidates or organizations and deduct it on your taxes.
Who does? To be safe, check the status of your favorite charity with the IRS, but generally most religious, environmental, animal, educational, and health-related charities qualify for deductible donations.
How do you plan on giving back?
What causes are you, your employees, and your customers passionate about? Aligning your giving strategy (and tax strategy) with your company culture and brand is a great way to get more fulfillment out of what you contribute.
Also, if you are trying to maximize your tax savings for the year and haven’t already reached the maximum limit for what you can contribute, as outlined in tip number 2, make sure you get all of your donations and contributions in before December 31 (or whatever your year-end date happens to be based on your fiscal year). If you’re late, you won’t be able to claim the donation as a deduction until the next year.