How to Deduct Charitable Donations – Beginning in 2018, the new tax code has made some modifications to your ability to deduct charitable contributions on your income tax return. Charitable deductions are still allowed for corporations and S companies, but not for other enterprises.
Your business income is carried through to your personal tax return if you run a sole proprietorship, partnership, or LLC. The new standard deduction has been raised to $12,000 for solo filers, up from $6,350 in 2017, and $24,000 for married couples filing jointly, up from $12,700 in 2017.
This means that individual taxpayers, even small business owners who pay business taxes on their personal tax returns, must itemize charitable deductions in order to earn a larger deduction than the standard deduction.
Furthermore, the IRS has altered the maximum deduction based on income percentage. In most circumstances, your charitable donation deduction cannot exceed 60% of your adjusted gross income (AGI), but in rare cases, lower restrictions of 20%, 30%, or 50% may apply.
Charities Must Be Qualified
If you’re thinking about donating to a charity as an individual or a business, make sure you’re eligible for a tax deduction. Because it is a church or because it applied to the IRS, the organization must be qualified by the IRS.
How Businesses Claim Charitable Deductions
Depending on the type of business you have, you can deduct charitable contributions in different ways:
Corporations and S corporations can deduct charitable contributions from their taxable income.
All other firms are considered pass-through entities and pay taxes as such. That is, the business’s taxes are passed through to the owners on their personal tax returns. Unless they give more than the standard deduction amount, their ability to deduct charitable contributions is limited.
Deductible and Non-Deductible Contributions
Any of the following can be deducted by you or your company:
- Contributions in cash
- Property or equipment gifts (called “in-kind” contributions)
- Based on the IRS-designated standard mileage rate for charitable work, mileage, and other travel expenditures incurred while working for a charitable organization.
- You cannot deduct the value of your or your employees’ time spent volunteering for a charitable organization, such as time spent on a nonprofit board or volunteering for a local United Way.
If the payments are not charitable contributions or gifts and are directly related to your business, you may be allowed to deduct cash payments to an organization (charitable or otherwise).
You cannot deduct the payments as business expenditures if they are charitable contributions or gifts.
Deducting Business Property Donations
Under some circumstances, your company may be able to deduct certain types of business property. You can take the following deductions:
- You can contribute business inventory at either its fair market value on the day you donated it or its basis at the start of the year, whichever is lower.
- Intellectual property, such as patents and trademarks, is valued at the lower of the fair market value or the basis. You may also be allowed to deduct a percentage of the property’s revenue for the property’s lifetime or 10 years, whichever comes first.
- Special regulations apply to food inventory for “seemingly healthful food from your trade or business.”
How Business Types Can Deduct Charitable Contributions
The limits on deductions, which apply to all types of businesses except corporations, are in effect for tax returns filed in 2018 and later.
Sole Proprietorships and Single-member LLCs
Your business taxes are filed on Schedule C of your personal Form 1040 if you are a sole proprietor. Because individuals can only deduct charitable contributions on Schedule A, your company cannot make separate charitable contributions.
To take the deductions, you must be able to itemize them. Because a single-member limited liability corporation (LLC) files taxes as a sole proprietor, the same is true.
Partnerships and Multiple-Member LLCs
Because the partnership does not pay income taxes, it is a unique situation. Each year, the partners’ income and expenses, including charitable contribution deductions, are reported on their respective Schedule K-1 forms.
If the partnership makes a charitable gift, each partner is entitled to a percentage of the deduction on his or her individual tax return. For instance, if a partnership with three equal partners donates $1,500 to charity in a year, each partner can claim $500 in charitable deductions.
Partnership contributions are limited to $250 unless the charity organization provides a written acknowledgment detailing the amount of a monetary donation, the value of the donated property, and an estimate of the value of goods or services offered in exchange for the gift.
Members of a multiple-member limited liability company can deduct charitable contributions in the same way that a partnership can.
An S corporation may deduct charitable contributions up to $250 if it receives a written acknowledgment from the charitable organization that shows the cash contribution amount or a description of property contributed, as well as an estimate of the value of goods or services provided in exchange for the contribution.
A corporation can make charitable contributions on its own behalf and deduct them from its taxes. The deductions are listed on the corporation’s tax return (IRS Form 1120). Deductions may be subject to limits.
Disclaimer: The purpose of this page is to provide general information on a specific tax topic. This essay, as well as other articles by this contributor, should not be construed as tax or legal advice. Consult a tax professional if you have any queries about the deductibility of charitable contributions.