In a perfect world, all charitable donations by businesses would be tax deductible. Unfortunately, there are caveats that entrepreneurs must know
It seems like tax law is always changing. As an entrepreneur, you’re tasked with keeping up so that your business follows all regulations while making sure you understand all of the tax breaks available to you.
The treatment of charitable contributions is an area of tax law that can be particularly complex and hard to understand. While tax benefits aren’t always reasons to start giving to charity, deductions have existed for many years for some charitable contributions.
What are the caveats, and what contributions are deductible? Here’s an overview of what the IRS has to say, as well as recent changes implemented in 2019.
Itemizing to deduct
Perhaps the first thing you should know is that charitable donation deductions are only applicable if you decide to itemize your deductions on your tax return. Many taxpayers take the standard deduction, as it’s often higher than a potential itemized deduction. However, charitable contributions can only be deducted if the taxpayer decides to itemize instead of taking that standard deduction (a figure which was raised by the Tax Cuts and Jobs Act).
If you’re itemizing and made charitable contributions, you can deduct up to 50 percent of your adjusted gross income (AGI)—but in some cases, limitations apply to the tune of 20 and 30 percent. If property is donated, the full fair market value may be deducted, thought adjustments may apply if the property’s value has appreciated.
Types of applicable donations
Qualifying contributions by either corporations or individuals can be cash, financial assets, or property, such as real estate.
The IRS lists the following types of organizations as qualifiable to be considered charitable contributions:
- A donation made for public purposes to the U.S., a state, or U.S. possession or political subdivision thereof
- An organization (community chest, corporation, trust, fund, or foundation) that operates exclusively for charitable, religious, educational, scientific, or literary purposes, prevents cruelty to children or animals, and is organized or created in the U.S.
- A religious organization such as a church or synagogue
- An organization for war veterans
- A nonprofit volunteer fire company
- A federal, state, or local civil defense organization
- A domestic fraternal society, if the contribution is used only for charitable purposes
- A nonprofit cemetery company, if the contribution is used for the care of the cemetery as a whole
These contributions have to be made before the end of the tax year.
New 2019 regulations
Earlier this year, the IRS and the U.S. Department of Treasury issued final regulations that impact charitable contributions. Taxpayers must now lower their deductions by the amount of state or local tax credits they get or expect to get in return. Taxpayers must also treat their payments in exchange for these credits as state or local tax payments.
The IRS is also offering a safe harbor to allow a taxpayer who itemizes their deductions to treat payments that are charitable contribution deductions as state or local taxes for the purposes of federal income tax on their tax return.
These final regulations went into effect on August 12, 2019, and apply to applicable contributions made following August 27, 2018.
Business expense for C corporations
The above guidelines apply to individuals and if you run a small business that is a pass-through entity (a qualifying sole proprietorship, partnership, LLC, or S corporation). If your business is a C corporation, meaning it is not a pass-through entity, it is considered separate from the business owner come tax time. Income is thus taxed at the corporate level as well, creating a potential double-taxation situation.
But one benefit of this business structure is that C corporations can actually write off charitable contributions as business expenses. And donations that are above the limit can be carried over into subsequent tax years.
Making charitable contributions is a worthy move. And while tax benefits may not always apply—especially if it’s more worth it to you to take that standard deduction—you could end up seeing benefits if you decide to itemize and have made the qualifying donations under tax law.
It’s always important to stay up to date with the latest tax changes. At Provident CPA & Business Advisors, we work with entrepreneurs like you, helping you pay the least amount of tax legally possible. We can help you understand the ins and outs of regulations and which approach will get you the most benefit when April rolls around.
Contact the team at Provident today to learn more about our tax and business services.