Many entrepreneurs are not only focused on their business, but also on the people surrounding them. If you’ve ever felt the impulse to support a cause or give back to an organization, that’s great! However, you should consider giving back from your business account rather than your personal account.
Right now, the money you give to a charity from your personal funds is called an itemized deduction. These deductions rarely exceed the standard deduction that’s given to every individual. In 2022, the standard deduction amount will be $12,950 for single people, and $25,900 for married spouses. If all your itemized deductions don’t add up to the standard deduction, your charitable giving won’t benefit you at all (financially speaking).
It might seem intimidating that your personal contributions must exceed the standard deduction to make a difference. However, that’s not the case for your business.
For example, a C-corporation may deduct up to 25% of its taxable income. hat’s HUGE for reducing your business taxes. However, there are five important things for small business owners to know about giving to non-profits.
First, only C-corporations can deduct a cash charitable contribution as a business expense, but as a sole proprietor, you do have some options. Let’s say you donate to a women’s shelter which is registered as a 501(c)(3) with the IRS — and it must be, in order for your gift to be tax deductible. Then, as long as your business received no goods or services in return, you may list the contribution as an itemized deduction on Schedule A of your tax return. This provides a tax benefit only if you’re able to itemize deductions.
Second, keep in mind that sole proprietors can’t deduct their non-profit contributions on Schedule C. That’s because it’s not a business expense that reduces self-employment tax. The IRS will view it as a personal expense paid from business funds. However, there is one important exception.
Third, if you support a 501(c)(3) organization as a sole proprietorship and receive goods or services in return, it can become a legitimate business expense. If you support a local soccer league and receive regular advertisement in return, for example, it becomes an advertising expense. This applies even for sole proprietors on Schedule C.
Fourth, donated services don’t provide any tax deduction whatsoever, but certain expenses for those donated services may apply. Let’s say that you run a lawn care service, and you donated a few staff members’ time to mow lawns for elderly seniors. While the IRS doesn’t place value on you or your team’s time and expertise, you may be able to deduct the gas mileage and material costs spent to perform your service. If you gifted each senior with an electric lawnmower, that could be written off as well.
Fifth, these same rules apply to other businesses (except C-corporations). Any cash donations made at the S-corporation or partnership levels will flow out as a special line item on your Schedule K-1, ending up on Schedule A of your individual income tax return. As mentioned, with any business other than C-corporations, this tax benefit only applies if you’re able to itemize deductions.
These qualifications for non-profit contributions may seem a little limiting, and it is — but that isn’t all! Although there are certain limits, utilizing your donations in a smart way can help you save money to do even more good. If you want your business to make qualifying charitable deductions, just give us a call! We’d be happy to help.
Dahl Law Group
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