Gregory S. DuPont
Charitable Giving Yields Tax Benefits for Businesses
By supporting a worthy cause, you or your business can help lower your tax bill through cash donations, as well as contributions in the form of unused inventory or sponsorship.
Choosing an Organization
When it comes to tax deductions for charitable giving, the rules are complicated. As you begin to formulate a giving strategy, be sure that the organizations you intend to support have been awarded tax-exempt status by the Federal government. In addition to not-for-profit organizations engaged in charitable activities, qualified groups include nonprofit schools and hospitals, most churches and religious organizations, veterans’ groups, and public parks and recreational facilities. You cannot deduct contributions made to political or lobbying organizations, most foreign charities or sports clubs, or for-profit groups.
If you are not sure if a group you are interested in supporting is qualified to receive deductible contributions, you can search for the name of the organization on the IRS website at www.irs.gov/app/pub-78. Businesses also have the option of making donations through exchanges that connect donors with qualified nonprofit organizations and provide the necessary documentation for tax deductions.
There are other things to keep in mind when developing a giving strategy. To start, the IRS does not view all charitable contributions as tax deductible, and different rules apply depending on the legal status of the business. Contributions by C corporations are limited to 10% of the business’s taxable income. Sole proprietors, partners, and S corporation owners cannot to take a business deduction for charitable contributions. Instead, gifts by these entities are considered personal charitable contributions and are handled accordingly.
For personal deductions, the amount may be limited depending on the type of property donated and the organization receiving the gift. Deductions for cash may not exceed 50% of adjusted gross income (AGI) for gifts to public charities and 30% of AGI for gifts to private foundations. For both long- and short-term appreciated property, the deduction is limited to 30% of AGI for gifts to public charities and 20% of AGI for gifts to private foundations.
Excess Inventory or Overstock
Many businesses donate excess inventory or overstock to charities. When individuals choose to contribute tangible property in the form of merchandise or other assets, they are generally permitted to deduct the amount of the property’s fair market value, or the price a buyer would be willing to pay for the item on the open market. However, specific rules apply to donations of business inventory.
C corporations are allowed to deduct the cost of producing the donated goods, plus half the difference between that cost and the fair market value of the goods, up to two times the production cost. Meanwhile, owners of S corporations, partnerships, and sole proprietorships may only deduct the cost of producing the inventory.
Other restrictions apply to food inventory. The foodstuffs donated must go to help infants or needy or infirm individuals, and the food must be needed for the charity’s exempt purpose or function.
Regardless of whether you are donating cash or property, request a written acknowledgement from the charity for gifts in excess of $250. This may, for example, take the form of a canceled check or a contribution statement from the charity, and it must indicate the amount of cash received or a description of the property given, as well as the value of any goods or services provided by the charity in exchange for the donation.
If you or your company receives something in return for a charitable gift, such as tickets to a benefit event or an item from a charity auction, you are only permitted to deduct the amount of your contribution that exceeds the fair market value of the benefit received. Thus, if you paid above fair market value for an item at an auction held by a qualified charity, you are permitted to deduct the difference between the retail value of the item and the amount you paid.
Other Charitable Endeavors
In addition to claiming tax deductions for charitable gifts, your company could choose to support a charity through sponsorship or cause-related marketing, in which a portion of the proceeds of sales go to the charity. While these initiatives do not qualify for charitable tax deductions, they can be claimed as marketing expenses. You and your employees are not allowed to deduct the time spent or the value of the services provided when volunteering for qualified charities, but you are permitted to deduct certain out-of-pocket expenses incurred in the course of voluntary activities, such as mileage.
If your business is contemplating larger donations or a series of donations over time, you may wish to establish a charitable trust or philanthropic foundation to manage the company’s charitable giving, as well as the tax benefits available to individual donors and their heirs.
Charitable donations, whether made by a business or its owner, are important to the mission of worthy nonprofits. They can also help generate positive publicity, boost a company’s visibility in the community, and improve the morale of workers, all while providing a tax deduction for the owner or the business. If you are considering a charitable giving strategy, contact one of our qualified tax professionals.