03/ 28/ 2002
by Barbara Weltman
Charitable giving makes you feel good twice: when you donate to a worthy cause, then again when your business gets a tax write-off. But how you take the deductions and the amount of the deductions you can claim depend on your type of business.
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If you're a C corporation:
- What you can deduct: cash donations made directly to tax-exempt organizations, including matching contributions for employee donations and property donations, including donations of inventory.
- The total charitable contribution deduction for the year cannot exceed 10 percent of your company's taxable income (exclusive of certain items). Excess deductions can be carried forward for up to five years.
- Property donations generally are limited to cost (basis). However, certain donations by C corporations qualify for enhanced deductions, such as property or inventory donated to a charity for the care of children, the ill, or the needy; donations of scientific property used for research by certain educational institutions or scientific research organizations; and donations of computers and peripherals to schools (grades K-12) and libraries. Caution: This rule only applies to computers donated within two years after their acquisition or completed construction date. The enhanced deduction is the property's adjusted basis (usually cost) plus one-half of its unrealized appreciation (but no more than 200 percent of the property's basis).
If you're a pass-through entity:
- If your company is set up as a partnership, a limited liability company or an S corporation, the entity reports any charitable contribution it makes.
- The amount of the deduction doesn't figure into the company's total income (or loss). Instead the deduction is passed through as a separate item to the owners according to their ownership interest. Owners then claim a charitable contribution deduction on their individual returns subject to the limits applicable to those returns.
- Example: You are a 50 percent owner in an S corporation that donates $1,000 to charity. Your share of the donation is $500. You deduct this amount as an itemized deduction on Schedule A of your personal income tax return. Note: These entities-including S corporations-aren't eligible for enhanced deductions for special donations.
If you're a sole proprietor:
- You claim your deduction as an itemized deduction on Schedule A, not as a business deduction on Schedule C.
- If you contribute an item from your inventory, be sure to subtract it from your closing inventory.
- You can't claim a deduction for a donation of your time—-no matter how much it's worth.
- For information about the tax rules on charitable contributions, including substantiation rules that must be met in order to claim deductions, see IRS Publication 526, Charitable Contributions, at http://www.irs.gov.
- Looking for an organization that needs your excess inventory or other property you want to donate? Various clearinghouses can help you locate worthy causes (for example, your local United Way, Gifts in Kind at http://www.giftsinkind.org and World Vision's Gifts-in-Kind Program at http://www.worldvision.org).
This article originally appeared in the March/April 2001 issue of MyBusiness Magazine, NFIB's member magazine.
