Giving Tuesday: Small Business Tax Breaks for Charitable Giving

Charitable giving is a great way to positively impact the world. However, small businesses may have difficulty finding room in their budgets for donations. Thankfully, you can get a tax break when supporting charities.

Donating to charity is worthwhile whether you get rewards for it or not. Still, these tax deductions help ease the economic burden of giving. If nothing else, they’re a nice bonus. If you’re going to give to embrace the holiday spirit or just be generous, you might as well claim the deduction, too.

Types of Tax-Deductible Charitable Giving

The IRS recognizes that charitable giving comes in many forms. As a result, a few different types of gifts qualify for tax breaks — namely, cash, business property and travel expenses.

Cash

Monetary gifts are the most straightforward tax-deductible type of charitable giving. Have you sent money to a charity within the tax year? You can write it off.

However, dropping a few pennies in the Salvation Army bucket around Christmas may not qualify. While no gift is too small to write off, the IRS requires a record of contribution for monetary gifts of any size. So, if you want to deduct these donations, make sure you get these documents.

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Business Property

You can write off some new equipment when you get it for work, but did you know you can also deduct giving it away? Physical and intellectual business property is tax-deductible if you give it to charity.

Any capital assets — like computers or other office equipment — qualify if they have at least a year of useful life. You can also donate your inventory if you have surplus products lying around. Even patents and trademarks are tax-deductible, though finding a charity to give them to may be trickier.

You’ll use the fair market value of these items on the day you donate them to determine how much you’ll get for them. If they’re worth $250 or more, you’ll need a record of contribution and some gifts — like food — need additional paperwork.

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Travel Expenses

If you’ve ever volunteered, you know your time is also a worthwhile gift. While your business can’t deduct the time it spends helping charities, it can deduct related travel expenses.

The IRS offers 14 cents per mile to cover your fuel, but deductions don’t end there. You can also deduct the costs of lodging or meals from your time traveling to help a charity. However, you must volunteer for at least one full workday to qualify and your travel must be solely volunteer-related.

Deducting Donations as a Pass-Through Business

Your tax break for charitable giving also depends on the kind of business you run. Most small businesses operate as pass-through entities (PTEs), like a sole proprietorship, partnership or limited liability company (LLC). If so, you can deduct donations in one of two ways.

Schedule A Deductions

The most straightforward way to deduct charitable donations as a PTE is to treat them as itemized deductions on Schedule A of your tax return. This is the same process as deducting any giving you’ve done as an individual.

You can generally deduct up to 50% of your adjusted gross income (AGI) on Schedule A. However, some charities carry unique limits restricting that number to 20% or 30%. If you donate in cash, you can deduct as much as 60%.

The biggest advantages of this route are that it’s relatively easy and you can qualify for some sizable write-offs. If you’re a sole proprietor and have moved recently, you can also give to local charities in your old city without changing your domicile, which is helpful for further tax relief. However, itemizing deductions is only worthwhile if you get more than the standard deduction, which is fairly high.

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Business Tax Deductions

Your other option as a PTE is to count your charitable gifts as business deductions on Schedule C. These have more limits, but the potential rewards are higher.

You must get some kind of business benefit from your donations to count them on your Schedule C. Promotion is a common example. If a charity puts your name or logo on something after you donate, you can consider that a business deduction. Not as many gifts qualify due to these restrictions, but those that do offer a tax break apart from the standard deduction.

Deducting Donations as a Corporation

The rules are different if you do business as a corporation. They can only deduct up to 10% of their taxable income in most years. Special situations apply to 2020 and 2021, which take that number up to 25%.

Corporations can qualify for all the same types of charitable gifts as PTEs. You’re also more likely to qualify for business expenses this way. However, the higher limit on the deductible amount may curtail your actual savings. It’s still worth it to get any tax break you can, but don’t expect that much in return.

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General Guidelines for Charitable Giving Tax Breaks

Regardless of what kind of business you run, the process of deducting your donations is largely the same. It all starts with the giving itself. All charitable donations are good, but not all are tax-deductible.

You can find qualified charities with the IRS’s Tax Exempt Organization Search. When you look up a business in this tool, it will reveal a code telling you its tax-exempt status. Public charities, private foundations and veterans organizations qualify, while political donations and for-profit private schools don’t.

You should also look for organizations that align with your business’s beliefs and image. Is sustainability a big part of your brand? Donate to an environmental nonprofit. Are most of your customers families? Consider giving to an educational fund.

Beware of scams, too. Be extra careful when giving around the holidays. Scammers often take advantage of the holiday season to pose as charities. Do your research to ensure you’re donating to a real place. Similarly, try to give to an organization where you know most or all of your money will actually go toward their stated cause.

Finally, emphasize communication. Get as much information from the charity as possible, especially official tax documents — you’ll need those when you deduct these gifts. It’s also a good idea to keep in contact with the charity. Let it know about your plans and promote them to your customers. These steps will help the organization and solidify your generous public image.

Embrace Charity as a Business

The holiday season presents an ideal time to be charitable. Take the opportunity to give back to your community and get a tax break while you’re at it.

No matter the time of year, embracing charity is a great idea as a business. On top of helping people, you can reduce your tax burden and show your customers you care about the community.