The Basics of Business Charitable Tax Deductions
Contributing to charitable organizations and causes is personally fulfilling and can be a good way for a business to help the community while building goodwill for the business. Many of the rules and requirements for deductibility of a charitable contributioni are the same for individuals and businesses, but whether the contribution is deductible by the business or the individual owner(s) depends upon the business structureii.
Sole Proprietorship or Single Member LLC
These business structures do not deduct charitable contributions as a business. As the owner files their business taxes on Schedule C with their personal return, the business cannot make separate contribution deductions. The owner must take them as personal deductions on Schedule A. This means that the owner must have enough in deductions to itemize to take the charitable deductions.
Partnerships and Multiple Member Partnerships
Because a partnership doesn’t pay income taxes, the income, expenses, and charitable deductions are passed through to the partners for filing on their individual Schedule K-1 forms. The partnership can, and many do, make charitable contributions, but the deduction is passed through to the partners. If a $2000 qualified contribution is made and there are four equal partners, each would then take a $500 deduction on their individual returns.
There is a limit on deductibility of partnership contributions of $250 unless the charitable organization provides written documentation of the value or cash amount of the contribution. The rules are the same for the multiple member LLC as for partnerships.
The S-Corporation can deduct qualified charitable contributions with the same $250 limitation unless value and donated property description are documented in writing by the charitable organization. The value of some services may be deductible if documented in writing and comparable to the paying customer costs for the same service.
As the regular corporation is an entity separate from the owners, it can deduct qualifying charitable contributions and report them on the corporation’s Form 1120 tax return. As with every business structure listed, there may be other limits on contributions, and tax law is constantly changing, so consult your tax expert before assuming deductibility.
General Deductibility Rules
You as an individual or your business can deduct:
Gifts of property or equipment
Travel expenses or mileage deduction for travel in volunteer work for a qualified charitable organization
Generally, you cannot deduct the value of your time or the time your employees spent as volunteers for a charitable organization. If you make payments to an organization that are not charitable, you still may be able to deduct them if they are directly related to your business.
Business Property Donations
Business property donated to qualifying charitable organizations may be deductible, including:
Business inventory – you can deduct the fair market value of inventory as of the day it is donated or at the beginning of the year, whichever is smaller.
Food inventory – there are special rules for donating food that apply to its wholesomeness and other conditions.
Intellectual property – this can be patents or trademarks, and they are donated at fair market value or the basis, whichever is less. There are some instances where you can deduct a percentage of the income from the property for the life of the property or 10 years, whichever is shorter.
This is a complicated area of tax law, so work with your accounting or tax expert to stay out of trouble with the IRS.
i IRS Publication 526, Charitable Contributions
ii How to Deduct Charitable Contributions, Jean Murray