What are tax deductions for donations?
Tax-deductible donations are sums of money or goods that a company gives to a charity, which is a tax-exempt organization. These donations allow companies to deduct up to a certain percentage in their taxes, helping them save money that would otherwise go to the government.
Why your business should consider donating
Your business should consider donating money to tax-deductible organizations like charities because it:
- Allows for a potential tax deduction for your business: A financial benefit of donating to a tax-exempt organization is the potential to receive a tax deduction for your own business. Make sure you comply with the right rules and regulations to qualify.
- Helps market your business: By sponsoring charitable events or donating money, supplies or other items, you can increase your company’s visibility at the local or national level.
- Encourages others to donate: Whether you operate at the local or national level, donating to a charity can prompt your industry’s competitors and your customers to donate as well.
- Provides support to an important cause: Most importantly, by donating to a charity, your business can help the charity maintain operations or expand their reach. Further, you can contribute to a cause that has personal meaning to you or your employees.
Standard deduction vs. itemized deduction
Standard deduction and itemized deduction are two methods offered to taxpayers within the United States and its possessed territories. Here’s the difference between them:
- Standardized deduction: Standardized deductions allow taxpayers to subtract a set amount from their income tax based on their qualifications. This is a common option for most people to reduce income tax.
- Itemized deduction: Itemized deductions give you the potential to minimize your income tax even more than a standardized deduction would. This is because itemized deductions include several separate deductions that allow you to claim more business expenses to deduct from your income taxes. Typically, the level of decreased income tax depends on your tax bracket and filing status.
How to claim a charitable donation deduction
To be able to deduct charitable donations from your taxes, you need to follow a process to claim your charitable donation deduction. Here is a list of steps to help you:
1. Donate to a charity
Referring to IRS guidelines, donate to a local or national charity. Even if you donated in previous years, you could still be eligible for a deduction if you chose the itemized deduction option on your tax form.
2. Keep documents to prove donation legitimacy
Once you donate to a charity, make sure you keep a detailed record of receipts, pay stubs or bank records that list the amount you donated, when you donated and to whom you donated. This could be helpful in allowing you to qualify for a charitable deduction should the IRS ask for additional records of the donation. It also helps you provide accurate information regarding the date, recipient and dollar amount to include on the deduction form.
3. Check for charities on the IRS Tax-Exempt Organization Tool Search
If you have already donated to a charity and are unsure of whether the charity qualifies as tax-exempt, you can find out by doing a quick search on the IRS Tax-Exempt Organization Tool Search. If the charity appears in the results, then it is most likely tax-exempt and approved to use in charitable donation deductions.
4. File the right form for your business
Different business entities require separate forms to document charitable donations, so it is important that you select the right one for the type of business you operate. For example, S-Corporations, LLCs, Partnerships and Sole Proprietorships all need to use Schedule A (Form 1040 or 1040-SR) to record and deduct their charity donations. In contrast, regular corporations should use their normal tax form, 1120-S or 1120-W to record charitable donations and deduct them from their taxable income. If your corporation provided non-cash donations, you need to also fill out Form 8283.
Frequently asked questions about donation deductions
How much of a donation is tax-deductible?
According to the IRS, you can deduct up to 50% of your adjusted gross income (AGI), although you might be able to deduct only 20-30% depending on the situation.
Can you deduct charitable contributions if you take the standard deduction?
No, you cannot deduct charitable contributions if you take the standard tax deduction. This is because you can only receive a deduction if you itemize your contributions.
What is the difference between tax deductions and tax credit?
Both tax deductions and tax credits provide members of the public and corporations with a way to reduce tax-related expenses. A tax credit is a dollar amount that members of the public can take away from the total amount they owe to the IRS or another entity in taxes. In contrast, tax deductions aim to reduce an individual or company’s taxable income. The difference between tax deductions and tax credit lies in what is that tax credits decrease the amount of tax you owe, while tax deductions decrease the amount of your income that can be taxed by the government.
What charities qualify for tax deductions?
There are several types of charities that qualify for tax deductions, including:
- A state or possession of the United States: You can donate to charitable organizations that operate at the state level, or are owned by one of the United States’ possessed territories.
- Community corporations: These charitable programs aim to provide either religious, educational, literary or scientific needs. They can also include organizations that try to raise awareness about animal, child or domestic abuse. In order to qualify, these organizations must operate within the United States or its possessed territories.
- Churches or other religious organizations: Churches, synagogues, mosques or other faith-based charities also qualify for deductible donations as long as they have locations in the United States or its territories.
- Nonprofit volunteer fire company: Volunteer fire companies operate at the local level, with residents volunteering their time to attend emergency situations. Because they operate out of a political subdivision, they qualify to be used in charitable tax deductions.
- War veterans organizations: These organizations provide beneficial services to war veterans by helping them obtain financial aid, housing, counseling, medical treatment and other services. To qualify for deductible donations, these organizations must be located in, or operated by, the United States or its territories.
- Civil defense organizations: A civil defense organization is one that aims to protect the civilians of the United States and its possessed territories. These organizations are owned and operated at the local, state or federal level.
- Domestic fraternal societies: Domestic fraternal societies are those owned and operated within the United States or its territories. These are typically associations or clubs for men, where they devote their time to performing charitable or social acts within their community. They can also offer religious or professional services. In addition, any money they raise for their society must be put back into the community or donated to a worthy cause.
- Non-profit cemetery company: Non-profit cemetery companies volunteer to clean up and maintain cemeteries in their area. If you donate to one of these companies, you can receive a deduction, but not if you only paid for a specific area or grave to be cleaned.
When can you take a charitable tax deduction?
You can take a charitable tax deduction at any time before the end of your tax year. If you do not take your charitable tax deduction before the end of your tax year, you can still do so the next year, so long as you have itemized your deduction.
Can I take a charitable tax deduction if I donated property to a charity?
Yes, you can potentially take a charitable tax deduction if you donated land or real estate to a charity or organization. You can do this by deducting the fair market value of the property.
Whether you own a local business or a multi-million-dollar corporation, there is always room to be of service to your community. By providing funds to a qualified charity, you can promote financial stability within your company while also making a difference in the lives of others.