Looking for additional tax write-offs and want to give back in the process? Consider tax-deductible donations.
The options are many when it comes to charitable deductions. Donating money is just one way your company can benefit from a charity tax deduction. It's also possible to donate supplies and inventory, employee manpower, real estate and even intellectual property.
Take some time to familiarize yourself with how do tax deductions work, and you can take advantage of giving to charity.
Benefits of Tax-Deductible Donations
"Businesses benefit immensely from making charitable donations—and not only financially," says Logan Allec, a CPA, who owns the finance website Money Done Right. "There are a wide variety of ways that tax-deductible donations can help your business."
"The obvious financial benefit of your business making a donation is receiving a tax write-off for the donation," says Allec. "How much of a tax benefit your company ultimately realizes depends on how the business is structured for tax purposes."
Tax Benefits for C Corporations
"C corporations are the only business structure that can take a charitable deduction directly," says Barbara Murphy, a partner at the law firm Farella Braun + Martel. (Murphy specializes in tax planning, including philanthropic planning.)
"Corporations may deduct up to 10 percent of taxable income, and this doesn't vary by the type of donee or contribution," says Murphy.
"Because the C corporation tax rate is now a flat 21 percent, charitable deductions from C corporations are potentially worth 21 percent of the amount donated in real cash terms," says Allec.
"That means if your C corporation donates $100,000 to charity, it will potentially save up to $21,000 in taxes on that donation, subject to the 10 percent of taxable income limitation."
Any excess donations are carried forward for five years, after which they are lost.
Tax Benefits for Sole Proprietors
"If you're a sole proprietor, for income tax purposes, your business is inseparable from you as an individual," says Allec. "This means the only way you can deduct a qualifying donation made in the name of your business is by reporting it as an itemized deduction on Schedule A on your tax return."
If you take the standard deduction on your income tax, you can't deduct any charitable contributions for the year.
If you own a C corporation, you can deduct the cost of donated inventory, plus half the difference between the cost and fair market-selling price, not to exceed twice the cost.
—Gary C. Smith, president and CEO, NAEIR
Tax Benefits for S Corporations and Partnerships
Similar to sole proprietorships, S corporations and partnerships are pass-through entities. That means that these companies don't pay federal income taxes directly—the owners do.
"If an S corporation or partnership with two equal shareholders makes a $10,000 donation to a qualified organization, each shareholder will receive a $5,000 deduction to take on their individual tax returns," says Allec.
In order to take advantage of such deductions, you must itemize them on your tax return.
Additional Benefits of Tax-Deductible Donations
The Slumber Yard reviews mattresses, and then donates some of them to local charities.
"It's rewarding to donate the mattresses, which are effectively brand new, to homeless shelters, foster homes and domestic violence centers," says Ross.
Taking advantage of charitable deductions can also increase employee morale and enhance your company's reputation, believes Allec.
"Most people like working for and buying from companies that do good in the world," he says.
"Tax-deductible donations can enhance and further your business's mission," adds Murphy. "For instance, if you own a software company and diversification of your engineers is important to your business mission, you could offer grants to a local university's engineering program to fund scholarships to diverse students."
Types of Qualifying Charitable Donations
A wide variety of qualifying charitable deductions exist. Here are some of the ways you can donate.
"Cash gifts are the most common of the tax-deductible donations," says Allec. "Rather than giving a little bit of money to several different charities, many businesses prefer to choose a few charities that align with their corporate mission and give generously to them."
Matching contribution campaigns are an effective strategy for cash giving, adds Allec.
"For every dollar your employees give to a certain charity or foundation, your company could match their gift with another dollar," he says. "This can be an incredible way to get your employees on board with your corporate mission as well raise even more money for the charity of your business' choice."
Inventory, Equipment and Supplies
Your company can also get a charity tax deduction by donating old or unused inventory, equipment or supplies. For instance, you could potentially donate electronics, office supplies, clothing, personal care items, cleaning products and toys.
"If you own a C corporation, you can deduct the cost of donated inventory, plus half the difference between the cost and fair market-selling price, not to exceed twice the cost," says Gary C. Smith, president and CEO of NAEIR (National Association for the Exchange of Industrial Resources), a gifts-in-kind organization that receives donations of excess inventory from companies and redistributes the donations to nonprofits and schools.
"This deduction is thanks to a little-known tax code, IRC Section 170(e) (3)," says Smith. "For example, if a product cost $10 and it sells for $30, the difference is $20. Half of $20 is $10. $10 product cost + $10 [being] half the difference equals a $20 tax deduction. Since $20 does not exceed twice the product cost, it's allowed."
Corporate Volunteer Days
If your business partners with a charity for a service day, and your employees serve while on your payroll, their salaries and wages are tax-deductible donations.
However, the value of your or an employee's time is not tax deductible, clarifies Allec.
"Let's say you're an attorney, and you provide legal services to a charity," he says. "You can't deduct the 'value' of your time as a charitable donation. However, you can possibly deduct your travel expenses to the charity, as well as other expenses you incurred directly related to providing your pro bono services."
Real Estate and Intellectual Property
Property can also be donated—either physical or intellectual. Rules vary in this area as to how and when you can deduct property. Fair market value is factored in, and an appraisal and valuation generally needs to be made for donated property.
Rules: How Do Tax Deductions Work
To be tax deductible, all donations must be made to qualified tax-exempt nonprofit organizations.
"You must donate to an IRC 501(c) (3) organization," says Murphy. "You can ascertain if the organization is qualified by checking on IRS.gov/EOSelectCheck, Guidestar or another third party vendor that lists IRS qualified charities."
You must also maintain adequate records for all donations, adds Murphy. "For cash gifts, you must have either a bank record that shows the name of the charity, the date of contributions and the amount, or a receipt/letter showing the same."
Tax-deductible donations exceeding $250 each require a written acknowledgment from the charity showing the charity's name, date of contribution, description of the property given, whether the charity gave you any goods/services as a result of the contribution, and if so, a good faith estimate of the value of those goods/service.
"If you make a non-cash gift—other than publicly traded stock—over $5,000, you must obtain a qualified written appraisal of the donated property from a qualified appraiser," says Murphy.
Read more articles on tax deductions.
Photo: Getty Images