Can businesses make cash and property (in kind) contributions to charitable organizations? Are they deductible? And how is the deduction actually taken? These are common questions to a common situation facing many small business owners and leaders of non profit exempt organizations. Like most tax questions, the answer requires more than just a yes or no.
Yes, all types of business organizations generally can make charitable contributions. However, charitable contributions are not business expenses (ordinary and necessary as defined by the IRS), and so they must be treated differently. For it to be deductible, the charitable contribution needs to be made to a qualified tax exempt organization, typically a 501(c)(3). IRS.gov has a search tool for tax exempt organizations. If the cash contribution is over $250, be sure to get a proper receipt; a canceled check is not enough. Charitable contributions to individuals are not deductible but they are allowed up to certain amounts (as a tax free gift). Finally, the value of donated services, even professional ones, are not deductible (though of pocket expenses generally are).
Since charitable contributions are not business expenses in the traditional IRS definition, the way contributions are deducted depends on the type of business organization. Sole proprietors and single member LLC’s deduct charitable contributions directly on Schedule A of their 1040. The tax payer must Itemize in order to get this deduction and there are some AGI limits on the amount that may actually be deductible. Multi member LLC’s and Partnerships and S-Corporations flow charitable contributions through to the members, partners, and/or shareholders via a K-1. These charitable contributions are also deducted on the individual’s 1040. C Corporations are able to deduct charitable contributions directly on their tax return (form 1120).
In addition to the tax benefit and the obvious act of helping those less fortunate, charitable contributions can be a great image booster and source of employee morale for businesses and their owners. There may be other issues to consider, so be sure to check with your CPA or tax adviser regarding your specific situation.