Deducting Charitable Contributions: A Guide for Small Businesses
by The Bean Team on July 24, 2018
3 MIN READ
Giving to charity sure does feel good. Just ask the 75% of small businesses that donate to charities each year. But, as a business, it might feel even better if you could deduct your charitable contributions on your taxes.
Technically you can, but it’s not as simple as you might think.
Who Can and Can’t Deduct Charitable Contributions
All structures of businesses except corporations pay taxes as pass-through entities, meaning the taxes of the business pass through to the individual owners. Consequently, the only businesses that can deduct charitable donations on their tax returns are C corporations. All other structures of business get left in the dust (that’s not to discount all the warm and fuzzy feelings that come along with giving).
As a general rule of thumb, charitable contributions are not allowed as a business expense on a business’s Schedule C. Charitable contributions are not considered a business expense and will not reduce your self-employment tax. The IRS views a charitable contribution made by a business as a personal expense paid from business funds. Deductions must be made through the personal part of a tax return (Schedule A for sole proprietorships and single-member LLCs).
Here comes the catch.
You can include charitable contributions on the Schedule A only if you itemize deductions for your personal tax return. If you don’t, you’ll lose the ability to write off any charitable contributions entirely.
But don’t let this dampen the feel-good vibes of giving back because you know what they say, when there is a tax code, there is a loophole. (They don’t actually say that, but it sure seems that way, doesn’t it?)
You Scratch My Back, I’ll Scratch Yours
There is a way to deduct charitable contributions as a business: if you get something in return. So much for altruism…
Under certain conditions, a business may deduct a charitable contribution as an advertising/marketing expense. For the expense to be classified as “advertising,” the business must be able to substantiate that it received a direct benefit for its donation. The cost can then be classified as an “ordinary and necessary business expense."
According to IRS guidance, costs that can be considered advertising expenses include:
- Messages containing qualitative or comparative language, price information, or other indications of savings or value
- An endorsement
- Inducements to purchase, sell, or use the products or services
Say, for example, your business donates $100 to the local high school baseball team, and in return the high school includes a small advertisement for your business in their program. Your $100 is no longer a “donation,” but rather becomes an “ordinary and necessary business expense,” and is therefore deductible on Schedule C. Just be sure to include this expense in your advertising/marketing account on your Profit and Loss Statement.
These same rules apply to S corporations, partnerships, and multi-member LLCs. Any donations made by businesses classified under these structures are included as special line items on Schedule K-1 and ultimately end up on Schedule A of the individual income tax return. Here again, you will only reap the tax benefit if you are able to itemize deductions.
C corporations, which are standalone entities, get to play by different rules. Donations made by C corporations do originate from the company and can therefore be deducted on Form 1120, following the IRS rules governing charitable giving.
Supporting Charity is Good for Business
There are plenty of reasons for businesses to donate to charitable organizations. First, it simply makes you feel good. Research has shown that even just thinking about doing something generous has mood-boosting benefits.
Second, it can actually boost employee morale. Employees respect companies that care for their communities. Charitable giving shows that your business advocates for social good and demonstrates a commitment to the community of which you are a part,.
Third, donating is great PR. Philanthropic businesses (think Apple) are among some of the most powerful in the world. Donations put your business’s name out there, humanize your business, and show current and future clients and customers that you care about your business and your community.
And lastly, if you play by the rules, your business can receive tax deductions from its charitable contributions. While you may not instantly see how your contribution benefits your community, you will quickly notice the tax savings.
It might like feel getting something in return for your donation defeats the purpose of “giving back” in the first place. Instead, think of it as two businesses helping one another succeed (reciprocal altruism, if you will). It doesn’t get much better than that.