Donating to charity is an American tradition, especially during the holidays. If you’re a business owner, it might even be a great way to reduce your tax bill. In Nashville, there are numerous nonprofits that qualify for tax deductible donations.
With the passing of the Tax Cuts and Jobs Act of 2017, however, getting tax write offs for charitable contributions has become more complicated. Consult with a Nashville CPA to find out if tax deductible contributions make sense for your company.
Under the new law, there are a few things you need to consider.
1. The charity has to be a qualified tax-exempt organization
To assure you get tax benefits from your charitable contribution, donate to a 501(c)(3) organization. However, certain entities are not required to register for a 501(c)(3) status, including churches, religious organizations, and some trusts, but are nonetheless qualified to receive tax deductible contributions. To find eligible Nashville nonprofits or to check if an organization is qualified, you can use this IRS tool.
2. Your business structure determines how tax deductions are applied
How your business is structured plays an important role on how you can realize charitable tax deductions.
- C corporations: As an individual entity, a C corporation is the only type of business that can directly deduct a charitable contribution from its taxable income. The tax deduction can be as much as 21% of the donated amount, as long as the corporation’s total deductions do not exceed 10% of its taxable income.
- Sole proprietorship, partnerships, and S corporations: As pass-through entities, business taxes for these types of organizations are passed on to the owners’ personal taxes. In an S corporation or partnership, the owners’ individual tax deductions are determined by the amount of their share in the contribution.Under the new law, you can itemize the deduction on your income tax return as before. However, if you opt for the standard income tax deduction, you may not deduct your charitable donations for the same year. You need to do the math to determine whether itemizing your deductions or taking the standard deduction gives you greater benefit.
3. What donations are tax deductible?
There are three basic types of tax deductible contributions:
- Cash: You can choose to give cash to many different organizations, or select only a few with a mission that’s aligned with yours.
- Equipment, inventory, and property: If you donate excess or old inventory, supplies, and equipment, the deductible amount depends on the fair market value of the items you’re donating, as well as the type of organization you’re contributing to.Property can be real or intellectual. Its value needs to be appraised to determine the amount of tax deduction
- Volunteer expenses: If you volunteer your employees to help in a charitable event or service, their salaries and wages may be tax deductible. Any expenses you incur for the volunteer work, such as travel and meal allowances, may also be deducted.
Consider the non-financial benefits of charitable contributions
With the higher standard deduction on income taxes under the Tax Cuts and Jobs Act, small businesses may find they get less tax benefits from charitable contributions. However, being actively involved in a charity can be rewarding in many other ways. It enhances your business’s reputation in the community, boosts employee morale, and helps you achieve your business mission. To many, these intangible rewards are more valuable than any tax benefit.
Review your options with your CPA to get the most out of your philanthropic donations.
Sources:
Tax-Deductible Donations: How Do Tax Deductions Work?, AmericanExpress.com
How to Deduct Charitable Donations, TheBalancesMB.com
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