First and foremost, charitable contributions are cash payments made to a qualifying non-profit, a 501(c)3 organization. GoFundMe is not a charity, and those payments are never business expenses. Whether you’re donating a percentage of sales or making a flat contribution every month, it’s often a powerful way to give back to an organization that you support or that aligns well with your business. But unlike other forms of expenses paid out of your business bank account, the charitable contribution probably isn’t as valuable to your business as you might think.
If you’re wondering, as a business owner, “Can I donate to charity from my business?” the answer is yes, absolutely, but the business won’t benefit from the donation in the form of a business expense or a tax deduction.
Does the intent matter?
Whether you decided to pay cash directly from your business bank account to make a $1,000 charitable contribution to your local 501(c)3 or you collected $10,000 in sales from customers with the promise to them that you would donate 10% of the sales that day to a charity. The $1,000 cash out of your bank and into the charitable organization is not a $1,000 business expense unless you’re a C-Corporation.
Where does the expense go?
Unless your business is taxed as a C-Corporation, no business may deduct charitable contributions or donations in any form from their business profit. That is one luxury that C-Corporations have.
Instead, owners of pass-through entities (anything other than a C-Corporation) must carry that charitable contribution to their individual income tax return. Here are the two ways to deduct charitable contributions on your personal, individual income tax return.
The IRS lets you reduce your income by a certain amount every year. The standard deduction that people get every year, essentially removing a certain amount of income from the total you’re taxed on, depends on your filing status. For example, in 2021, that’s $12,550 for single filers and $25,100 for married individuals.
So if you file with a spouse, your first $25,100 of earnings in 2021 are not taxed at all. If you take the standard deduction every year, you can use the charitable contributions that you made during the year to deduct an additional $300 if you’re single, $600 if you’re married for charitable contributions. Any amount contributed over that $300 or $600 is not used at all to reduce your income and is gone forever. Bummer!!
There is also an option to take the itemized deduction if yours is higher than the standard deduction. The itemized deduction is calculated by adding your state, local, and real estate taxes paid during the year (limited to $5,000 for single filers, $10,000 for married filers) to your mortgage interest and the charitable contributions that you made during the year. If those combined amounts are higher than your standard deduction, you can itemize, and you will benefit from the charitable donations you made through the business.
Not every business move you make should be motivated by taxes. But most business owners assume that business funds used with business intent, regardless of where the money is going, are treated the same. But charitable contributions or donations are one of those exceptions.
Ensure that you understand whether or not you’ve itemized on your personal income taxes over the last few years because that will clue you in whether or not you can use the charitable contribution as a deduction on your personal income taxes.
Suppose you usually take the standard deduction. Instead of that direct charitable contribution to the organization, you can sponsor one of their events or do something more direct with that charity that will serve more as advertising and marketing for your business than directly donating to charity. Those expenses would be deductible business expenses, just like any other advertising and marketing that you do.
It’s very important to ensure that those contributions that you are making are broken out separately on your books, ideally in the equity section, since they’re not deductible business expenses. That way, they can easily be identified and input on your individual income tax return.
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