LAST REVIEWED Apr 03 2019 12 MIN READ
By Cyndia Zwahlen
Your small business can trim its income tax bill by taking tax deductions for charitable donations of everything from old inventory to extra office supplies to cash as long as you make sure to follow a few rules.
First, make sure you will be allowed to take a tax deduction for your charitable donations.
To do so, you’ll have to be able to answer “yes” to these four questions:
Do you itemize deductions on your tax return? You aren’t allowed to claim a deduction for a charitable donation unless you itemize your deductions on your tax return. When you itemize, or individually list each deduction you want to take, you do so instead of taking the standard deduction allowed by the IRS. To itemize, you’ll have to list your deductions on Schedule A of the IRS Form 1040.
Does the charity qualify for tax-exempt status under IRS rules? Not every nonprofit does. Check the status of the charity to which you want to donate. It has to be registered with the IRS as a tax-exempt 501(c)(3) nonprofit for your donation to qualify for a tax deduction. You can search the IRS list of qualified charities on its website here.
Will the charity be able to use the donation? To claim the fair market value of your donation as a tax deduction, your donation has to be put to a use by the charity that is related to the charity’s tax-exempt purpose or function.
Did you get a complete receipt? If you are audited by the IRS, you will have to show an itemized receipt for any charitable tax deductions you have claimed or risk having the deductions disallowed.
A cash donation of more than $250 requires a receipt or letter from the charity spelling out whether or not you got any goods or services in return.
Tax deduction rules for cash donations
Cash donations to charities are popular because they are easy to do and the value, when it comes time to figure out your tax deduction, is clear. Just keep in mind these tips when you make a cash donation:
Did you get something in return for your donation?: If you get a benefit from your cash donation, such as event tickets or other goods or services, you have to subtract the value from your donation when you calculate your tax deduction. So if you give $100, but in return your business gets an ad in the charity’s event program worth $50, you can only claim a tax deduction of $50.
A cash donation will not give you a dollar for dollar tax cut: A $50 cash donation does not equal a $50 reduction in your income tax bill. Charitable donations, cash or non-cash, are like other itemized deductions, which are subtracted from your adjusted gross income to get your taxable income. A cash gift will lower your tax bill, but not to the full extent of the donation. So if you are in the 25% tax bracket for an individual filer in 2016 (you earn $75,301 – $151,900), you would typically save 25 cents off your taxes for each dollar you donated.
Timing is everything: You take the tax deduction for the year in which the donation was paid out, not the year it was pledged. A charge on your credit card counts, even if you don’t pay it until the next year. The exception: if your business uses the accrual basis for accounting.
Company matches are deductible: Matching your employees’ charitable cash donations is a good way to encourage charitable giving and earn a tax deduction. Your matches are counted by the IRS as regular cash donations by your business.
Non-cash charitable donations: inventory, equipment, company stock, etc.
Here are some examples of charitable donations, aside from cash, that also could earn your small business a tax deduction:
Inventory: If old, obsolete or extra inventory is taking up valuable storage space, consider donating it. For example, your business might make aprons and have a batch of discontinued styles. Earn a tax deduction and donate the new, but unwanted inventory to, say, a nonprofit cooking school.
Donations of inventory have to be able to be used by the charity itself, and not sold, for your business to claim a tax deduction for the donation.
Equipment and furniture: You can donate used business equipment and furniture to a qualified charity and take a tax deduction for the fair market value.
For example, your restaurant or bakery might have used but working kitchen appliances to get rid of. You could donate the equipment to a homeless shelter kitchen and take a tax deduction for the fair market value. That’s what you could sell it for, used, at the time you donate it.
Supplies: If cleaning out the office supply closet is one of your new year’s resolutions, don’t pass up the chance to earn a tax deduction by donating the items to a qualified charity. You can claim their fair market value, which is probably close to what you paid for them if they are fairly new.
Vehicles: If your business is ready to buy a new delivery van or company car, you may want to donate the old one. Charities can use the old vehicle or they can sell it and use the money for their work.
You can deduct the fair market value of the donated vehicle. That value could be less than the so-called Blue Book value found in a used car guide, the IRS warns, depending on the vehicle’s condition.
If the charity will sell the vehicle and the vehicle’s fair market value is more than $500, you can deduct whichever is less: the money the charity gets from the sale or the fair market value. Either way, you’ll need an itemized receipt that notes the fair market value to claim the deduction.
Company stock: A donation of company stock is considered a non-cash gift. Keep good records of your gift and its value. If your stock is publicly traded, the value of the gift stock is the average of the highest and lowest trading prices on the day you donate it.
If your company has not yet sold its stock to the public, an appraiser will have to value the stock gift if it will be worth more than $10,000, or you can use another IRS-approved method.The day of the valuation is considered to be the day of the gift.
The factors you should use to value your private company stock start on page 5 of IRS Publication 561, “Determining the Value of Donated Property.” Also, be sure to check with your tax advisor!
How much can my business deduct for charitable donations?
Overall, you can typically claim charitable donation tax deductions of up to 50% of your adjusted gross income, which is your income after certain deductions, such as contributions to an IRA retirement account.
Warning: You will be at a higher than average risk of attracting the attention of an IRS tax auditor if the tax deduction you claim for a charitable donation is higher than average for you or your business’s income level. If in doubt, check with a tax advisor.
If your small business is donating inventory, the amount you can deduct will depend on the legal form of your business.
If your business is a sole proprietorship, a limited liability company (LLC), a partnership or an S corporation, you can deduct the fair market value of the inventory items you donate.
If your company is a C corporation, it can deduct the cost of the items donated (what your company paid for them) as well as half the difference between their fair market value and the cost of the items.
Each year you are limited to a maximum tax deduction for charitable cash donations of 10% of your business’s taxable income. The excess can be carried over to future tax returns for up to five years.
Services, time, and other things that can’t be donated (for a tax deduction)
The value of your donated professional time
The value of your donated services
Money or property donated to a chamber of commerce, social club or political group
The cost of an appraisal required to determine the worth of high-value property before you can take a tax deduction for donating it
You can certainly do all of the things above (volunteering is a great thing to do!) but you won’t receive a tax deduction for these activities.
If you want to donate to charity and be confident the donation will qualify for tax deduction, it’s best to check with your tax advisor.
Done right, donating to charity can be a win-win for your small business: The charity gets needed resources and your or your business get a break on income taxes.
Cyndia Zwahlen, a former small-business columnist for the Los Angeles Times, is a freelance business writer and editor for media, academic and business clients. She founded the Small Biz Mix blog.