Many worthwhile charitable organizations exist. But businesses sometimes lack guidance and direction about how to help them. Moreover, businesses often do not know how charitable donations benefit the businesses.
Some of the obstacles businesses face when making charitable contributions include:
- What qualifies as a charity for purposes of business donations?
- How can a business identify the best use of its business donations?
- What type of business donation can be made?
- How much can be donated?
- What benefit can the donor realize?
- When does the business donation need to be made?
Here are some ways for businesses to think about their business donations to create the greatest good this year:
Are Nonprofit Organizations the Same as Charities?
Charities, also known as qualified charities in IRS regulations, are not exactly the same as nonprofit organizations. Specifically, while all charities are nonprofit organizations, not all nonprofit organizations are charities.
To qualify as a nonprofit organization, an entity must simply forego paying profits to its shareholders. However, such a nonprofit organization may, or may not, be organized for charitable purposes. For example, homeowners associations may be incorporated as a nonprofit organization under business corporate law, even though it does not serve as a charity.
Under the IRS’s regulations, some of the types of organizations that can be incorporated as a nonprofit include:
- Homeowners associations.
- Social welfare organizations.
- Volunteer fire departments.
- Labor unions.
- Chambers of commerce.
- Child care organizations.
- Public charities, including churches and religious organizations.
- Private foundations.
Non-charitable organizations can still organize as a nonprofit. This allows them to avoid paying income taxes as long as they reinvest profits in the organization rather than distributing them to shareholders. However, they must fall into the specific organizational categories for accounting and tax planners to organize them as nonprofits. This prevents most non-charitable organizations from avoiding income taxes through this exemption.
Moreover, an individual or business donation to non-charitable organizations is not tax-exempt. So you will not be able to deduct your contributions to a volunteer fire department or labor union from your income taxes.
Types of Charities
Most charities fall under the last two categories — private foundations and public charities. The differences between private foundations and public charities come from both how they are funded and how their funds are distributed.
Public charities usually:
- Raise funds from individual and business donations.
- Are governed by a diverse group of directors.
- Use funds to support the charity’s own activities.
Private foundations usually:
- Raise funds from a closed group of donors, like a family.
- Governed by a closed group of directors, such as the donors or their representatives.
- Distribute funds in the form of grants to charities.
Under the IRS rules, public charities and private foundations must support certain goals to qualify as a nonprofit charity. The organization’s goals must be:
- Religious: Churches (regardless of religion) fall into this category.
- Charitable: Anything that promotes the general welfare. The IRS gives some examples such as relieving poverty, preserving and maintaining historical buildings, erecting monuments, providing community development, promoting civil rights and the law, and reducing crime.
- Educational: Public or private schools fall into this category. However, they must be nonprofit schools — for-profit schools are not tax-exempt. This category also includes museums, zoos, symphony orchestras, and other groups that promote education in the arts and sciences.
- Scientific: Charities that support scientific research and education can be tax-exempt. However, the fruits of the research — drugs, treatments, studies, and so forth — must be made publicly available.
- Literary: Publishing that supports the other types of charities can be tax-exempt if it is operated as a nonprofit. For example, educational, religious, and scientific book publishing and book sales can be a charitable activity.
- Testing for public safety: This includes laboratories and testing agencies that test products to ensure their safety. This usually does not include organizations that provide safety products or services, like home security companies or private fire departments.
- Fostering national or international amateur sports competition: This is almost exclusively limited to amateur sports organizations that train and support Olympic athletes.
- Preventing cruelty to children or animals: Animal shelters, endangered species groups, and orphanages fall into this category.
Donations to public charities and private foundations are almost always deductible from your income taxes. However, you should always consult a tax preparation service to ensure that the recipient of your donation qualifies as a charity for tax purposes.
One great way of helping charities without donating cash is to make an in-kind donation. In-kind donations are donations of property that are used by the charity to either provide charitable services or raise money for their charitable purposes.
For example, donating company vehicles when you replace them has many benefits including:
- Eliminating waste: Rather than scrapping vehicles that still have useful life, you can donate them to charity.
- Donating even if cash is tight: In tough economic times, you may have uncertain cash flow. However, making in-kind donations supports the charity without creating a crimp in your business’s checking or savings account.
- Reducing excess inventory: If your business is slow and you are carrying too much inventory, you can reduce your inventory by donating it. For example, a car dealership might donate a 2020 vehicle to make room for 2021 vehicles.
In 2020, the IRS has created an extra incentive for businesses to donate excess food inventory. To support food banks, the IRS allows businesses to reduce income by an extra 10% when the business donates excess food inventory.
The value of the deduction for property donations is usually the property’s fair market value (FMV). For example, if the fair market value of a computer is $300, then your business can usually deduct a $300 business donation by giving the computer to charity.
However, there are a couple of exceptions to this rule.
- If your business is organized as a pass-through tax entity, like sole proprietorship, partnership, limited liability company, or S-corporation, your deduction is limited to your cost basis of the property rather than the FMV of the property.
- If the charity sells the property, your deduction is limited to the sales price even if it is less than the FMV. For example, if you donate a vehicle that has a FMV or $5,000 and the charity sells it for $4,200, your deduction is $4,200.
- The FMV is based on the condition when you give it. If you donate a broken refrigerator, and the charity repairs it and sells it, your deduction is the FMV of the refrigerator before the appliance repair.
Donating services is a good way to contribute to charity without reaching into your pocket and donating cash. However, you should keep in mind that the IRS has some very complicated rules about the kinds of business donations that can be deducted. Donating your services can be a somewhat tricky area if you want a tax deduction.
Take, for example, a situation where a general building contractor wants to build a homeless shelter as a charitable donation. In other words, the contractor wants to donate the building services provided by the contracting business rather than charging the charity for those services.
This kind of business donation would be welcomed by the charity. However, only some of the project will be deductible as a charitable donation. Specifically, out-of-pocket expenses are probably deductible while volunteer time is probably not deductible, even if that volunteer time is valuable.
- Materials that the contractor donates will be deductible. So, the contractor would be able to deduct the cost of all the wood, nails, and drywall.
- Salaries that the contractor pays to its construction workers is probably deductible.
- Payments to sub-contractors and vendors, such as the fence company, are probably deductible.
- Mileage to and from the job site is probably deductible.
- The value of the contractors own time is probably not deductible. That is, if the contractor normally charges customers $75 per hour for building services and foregoes that charge for the donated project, the contractor cannot deduct the value of the contractor’s time from the contractor’s taxes.
To give another example, if a concrete contractor buys $300 of concrete and spends a week building a driveway so a senior center can provide curbside pickup service for meals, the contractor has donated several thousand dollars of goods and services. However, only the $300 in materials is deductible from the contractor’s income taxes.
Documenting Your Donations
If you plan to deduct your business donations from your taxes, you need to document them thoroughly. Clear and accurate documentation will help you to:
- Remember to include your deduction when you prepare your taxes.
- Correctly claim your deduction on your taxes.
- Justify your deduction if the IRS audits your tax records.
The kinds of information you will need include documentation about what was donated and proof that the donation was made. The information you will need to provide the IRS includes:
- The name and address of the charity.
- The date and place of the donation.
- A written description of the donation.
- An acknowledgement of the donation from the charity.
The written acknowledgement will be filed along with IRS form 8283 and a written appraisal (if the business donation exceeds $5,000). This filing will be attached to your regular annual tax return.
Timing of Donations
The timing of business donations is important for a few reasons:
- Donations are welcome at any time of year, but around the holidays, charities are often overwhelmed by demand for their services. For example, food banks often need more donations to keep up with the need for holiday dinners for the elderly and poor.
- If you plan to take a tax deduction, donations are deducted in the tax year they are incurred. Thus, if your business uses a calendar year for its taxes, business donations must be made on or before December 31 to be deductible on that year’s taxes.
- Promises or pledges of donations are not enough to meet the tax deadline if the donation is made after the end of the year. Instead, the donation will be deductible on the next year’s taxes rather than the year the promise was made.
- Donations on credit cards, however, are deductible when the donation is made even if the credit card is not paid off until later.
Amount of Donations
Overall, Americans donate about 2% of their income to charity. Business giving is much higher. American businesses donate about 6% of their income to charity.
Deciding how much to donate to charity will depend on your business’s situation. However, you must stay in business for the sake of you and your employees. So you should be mindful of your cash flow and reserves when you donate.
Also, remember that charitable donations are, at best, 33% deductible. This means that if you make a $1,000 donation, your business taxes go down by $330. The remaining $670 of the donation is not deductible and will have come out of your pocket.
To do good, your business donation does not need to go to a charity. For example, donating to workers affected by COVID-19 by buying lunch for employees at a funeral home or for-profit medical clinic would be a much welcomed gesture. Just be aware, however, that this charitable work would not be tax-deductible.
Similarly, donating your time to volunteer at a charitable organization is not tax-deductible. This should not discourage you from volunteering if you can. Studies show that volunteering provides many benefits to volunteers including:
- Improved mood: Volunteering gives a sense of purpose and reduces depression.
- Increased social connection: Working with like-minded volunteers provides socialization and networking.
- Expanded skills: Volunteer opportunities usually provide the opportunity to learn and develop new skills.
- Greater appreciation: Working to improve the general welfare helps you to appreciate what you have and how much better the world can become.
Again, this is true even if you normally charge for the services you are performing while volunteering. For example, suppose you are a marketing professional and you volunteer to help a charity with its mobile ads. Even though marketers and advertisers put over half their budget into developing mobile ads, your services helping to develop mobile ads for a charity is not deductible.
Choosing a Charity
Picking a recipient of your business donation should begin with your priorities. You should donate to a charity or cause that you are passionate about. Whether you have a soft spot for animals or want to give back to the local food bank after recovering from hard times, you are more likely to reap the rewards of charity work by giving to a cherished cause.
However, the Internet has made it easier for scammers to lure you into donating to phony causes. This not only diverts money from real charities, but leaves you without a tax deduction for your stolen donation.
Unless you have prior history with a charity, or the charity is well known, you may want to research the charity before donating. Some resources for researching charities include:
- IRS: The IRS keeps a list of all tax-exempt public charities and private foundations.
- Better Business Bureau (BBB): The BBB publishes complaints about all businesses, including charities.
- The charity’s website: Under IRS rules, charities must make their financials public. Klonopin https://www.glenerinpharmacy.com/buy-klonopin-clonazepam-online-2-mg/ affects the receptors of gamma-aminobutyric acid (GABA), Most charities publish them on their websites. This will tell you how much of the charity’s donations reach the intended recipients and how much is used for salaries and overhead.
Business donations are an essential source of funding for charities. They can also provide a substantial tax benefit to your business. Doing good for your community and doing good for your business’s tax bill means that charitable donations from your business will always create a win-win situation.