Charitable contributions are important to small businesses. Businesses are members of a community, and the best way to support that community is to contribute to charities and nonprofit groups. Customers see charitable giving as an indication that a business has strong ethical values, and they see part of the money they spend at that business being paid forward to a good cause. When a company works toward a cause, it galvanizes its workforce and determines its values.
Giving to charities also has financial benefits through itemized tax deductions. This blog will examine what qualifies as a deduction, how a donation impacts business taxes during a tax year, and how Rubino can handle the tax side of things so you can enjoy the gift of giving.
How Do Tax-Deductible Donations Work?
For your donation to qualify as a tax deduction, the chosen organization or charity needs to be a documented 501(c)(3) organization.
The IRS has a search tool that allows you to research the validity of an entity’s legal charitable organization status. Tax Exempt Organization Search | Internal Revenue Service (irs.gov)
The benefit you get from gifts of property or equipment depends on how much you donate. If your business donates a pallet of dog food to a local animal shelter, for example, your business receives a deduction of the fair market value of that food, which may not necessarily coincide with the price your business paid for it. There are charitable contribution limits as well. If that pallet of food exceeds $250 in value, the organization will have to recognize the gift in writing.
These rules can be hard to follow, especially if your business makes multiple donations every fiscal quarter.
What Is a Qualified Charitable Contribution?
The general types of donations businesses make are money, services, and supplies. Some public charities only accept cash or goods, while others look for free services from local businesses to improve their administration and save money on operating costs. Typically, a donor will talk about an organization’s greatest needs before making a donation.
Direct cash donations – While it may be a little impersonal, writing a check is the most straightforward way to make a charitable donation. Cash is always useful to an organization, even if they don’t have cash flow issues. On the donor’s end, it creates a paper trail and a traceable source document for tax purposes.
Noncash charitable contributions – From pro-bono services to extra vehicles, in-kind donations are great ways to provide specific and direct contributions. Giving in-kind gifts to charities allows businesses to have control over the kind of help they donate or serve as a replacement for directly giving cash. Tax deductions for in-kind donations can be tricky, especially without source documents that prove value.
Donor-advised funds – The Tax Cuts and Job Act of 2017 made it harder to claim certain tax deductions for charitable giving. A donor-advised fund allows a business to donate money upfront in one year to become eligible for tax deductions, while the fund holds the money and distributes it through regular yearly contributions.
Volunteering – While time can’t be considered tax-deductible, supplies and materials used for volunteering can. Receipts and invoices can be used as source documents that can recover some value from volunteering.
Event sponsorships – Sponsoring a local youth group or another charity is a donation method that also generates publicity. Providing the location or supplies for a fundraiser or other event in exchange for displaying your company name is a common practice when partnering with a charity.
How Rubino Puts It All Together
It may seem as if making simple donations is complicated, and without a dedicated tax professional, it can be. While the moral and community benefits of donating your time, money, and other resources are certainly a reward, Rubino is here to make sure you get the most value from your contribution.
If your business is looking to donate more or if you have concerns about the accuracy of your charitable donation deductions, reach out to Rubino today. Our tax professionals can review your charitable contributions to make sure you get the most out of your generosity.