Your Guide to Charitable Donations for Small Businesses
It goes without saying that COVID-19 has caused financial stress on small businesses across the globe. In fact, in the first week of forced closures and shelter-in-place orders, we saw as much as a 62% decline in the number of hours employees at small businesses were working (Homebase). But as lockdown restrictions are starting to ease up, many small businesses have been able to re-open and start their return to business as usual. Amid this environment of tumultuous issues, small businesses everywhere are looking for ways to get involved and show support. There is no better time than now to start making charitable donations!
Charitable donations are an ideal opportunity to give back to your community or a specific cause, and they are also tax-deductible. If you have the funds available and are looking to donate during this time, here is a roadmap we have created to guide you through.
Step 1: Verify that the organization is a qualified charity.
If you are unsure on whether an organization is considered a qualified charity, there are two ways you can verify:
- Use the IRS online search tool. Qualified organizations must meet specific requirements as well as IRS criteria, and are often referred to as 501(c)(3) organizations.
- Ask the charity to send you a copy of their IRS determination letter confirming their exempt status.
Step 2: Confirm the deduction is eligible.
In order to take a deduction on a tax return, you have to make sure the type of giving you’re participating in is qualified. Charitable donations can exist in the following forms:
- Cash contributions
- Gifts of property or equipment
- In-Kind contributions (for example goods or services in lieu of cash)
- Mileage and other travel expenses related to work done for a charitable organization.
Something important to be aware of when making a donation is lobbying. Lobbying means seeking to influence a politician or public official on an issue; a donation should be wholesome, not an act of persuasion. In addition, you will not be able to claim a charitable deduction for anything paid to an organization if one of these two concepts apply:
- You are lobbying on affairs that are of direct financial interest to your business.
- You are contributing for the purpose of avoiding the rules that prohibit a business deduction from lobbying expenses.
Step 3: Know your limitations.
Sole proprietors, those in partnerships, or S-corporation shareholders are eligible for deducting charitable contributions paid by their company, but only on their personal tax return (Form 1040, Schedule A), not as a business expense. Charitable contributions can also be made in the form of property; you can learn more on that here.
Step 4: Organize your donations into categories.
Donations have different categories when filing taxes, and each category has its own criteria when it comes to determining the extent of a charitable donation. For example, travel expenses related to services performed for the charitable organization can qualify as deductible, but the time spent volunteering those services is not. In most cases, you can deduct up to 50% of your adjusted gross income. Any non-cash donations totaling more than $500 require completion of an additional form on your tax return (Form 8283), and only contributions made within the current tax calendar year can be deducted.
Step 5: Keep your records of charitable donations.
As with all business transactions and personal tax items, don’t lose track of your records! Keep them in a safe, organized place in case you need to refer back to the documents or produce them as proof to support your returns. If you donated to an organization, make sure you get a receipt and keep it on file. You should also keep canceled checks, bank statements, and payroll deduction records to show proof of your donation. The IRS requires proof of payment and an acknowledgment letter for donations that total $250 or more.
If you are an individual or small business looking to donate and need more assistance, Taurus CPA Solutions can help! We are a full-service accounting, tax and consulting firm offering a broad range of professional services focused on the needs of small business owners. Take a look at our services page, contact us online, or give us a call at (410) 465-4600.