Many business owners consider philanthropy an important part of their professional and personal lives. Giving back can take the form of volunteering time or donating money or goods to help support causes important to you.
While most owners give because they believe in the causes and organizations they’re supporting, there can be significant tax benefits to giving as well. Specifically, donations of money or property made to qualified charitable organizations may be deductible on your business’s federal income tax return.
Many nuances and rules govern the deductibility of charitable contributions, but the most important one is that the recipient must be a qualified charitable organization as defined by the Internal Revenue Service. These are usually referred to as federally approved 501(c)(3) organizations and generally include most religious, educational, scientific, literary, and charitable groups. If in doubt you can ask to see a charity’s 501(c)(3) paperwork.
There are a few things to consider when making charitable contributions.
Monetary donations by cash or check must be made no later than December 31 of the year in which you plan to take the deduction. For contributions of $250 or more (whether monetary or property), obtain a written acknowledgment from the charitable organization that indicates the amount of cash or a description of the property as well as whether the charity provided any goods or services in exchange for the donation. This can be a canceled check, a bank statement with the name of the charity, or a written communication from the charity, such as a year-end contribution statement.
You can make tax-deductible contributions of merchandise, inventory, and equipment to charitable organizations. The amount of your deduction should be based on the property’s current fair market value. If you donate used clothing and other items such as furniture, electronics, and appliances, they must be in what the IRS considers “good or better” condition for you to receive the deduction. Online programs and tax preparation software can help you value used items properly.
One taxwise charitable giving strategy is to donate appreciated property instead of cash. This is often done with appreciated securities that have been held by the donor for at least one year. By doing so, you can deduct the full fair market value of the security and avoid paying capital gains taxes on the appreciation that would be due when you sell the security.
The IRS recently made some changes that affect how much can be deducted when donating automobiles, boats, and airplanes. If the charity sells the property, you can only deduct the amount it receives from the sale, not its fair market value. Ask the organization for a receipt substantiating this value and include it with your tax return. But if the charity keeps the property for its own use or it is worth $500 or less, you can deduct the fair market value. If the value of your property donation is more than $500, you must complete IRS Form 8283 (noncash charitable contributions) and file it along with your return. If it’s worth more than $5,000, you should obtain a professional appraisal and attach Section B to Form 8283.
If you receive something of value from a charitable organization in return for making a donation, you can only deduct the difference between the amount or value of your donation and the value of what you received. For example, if you contribute $1,000 to a charity and receive a token of appreciation in return that’s worth $250, you would deduct $750 on your federal tax return.
For detailed guidance on the tax rules that govern deducting charitable contributions, consult IRS Publication 526.
Don Sadler is a freelance writer and editor specializing in business and finance.