Just like individuals, small businesses can claim tax deductions for qualifying charitable contributions. Charitable contributions can support your community, garner interest in your business, and make you and your employees develop a positive self-image, all while saving you money on your taxes. However, to make the most of your charitable contributions, you should understand these basic tax rules and accounting methods.
Contribute to Qualifying Charitable Organizations
There are many worthwhile organizations that do not have tax exempt status. Unfortunately, if you make contributions to these organizations, your contributions will not be deductible from your gross income when it is time to file your taxes. The general rule is that churches and governments are automatically tax-exempt. Any other charitable organization must file for their status as a charity. If you are unsure about an organization's current tax status, you can look it up on the irs.gov website.
Do Not Make Donations To or For Individuals
Even if you are making a donation to a qualifying charitable organization, if you state that the money must be used for a specific individual, your donation will no longer be tax deductible. Essentially, you must agree that the charitable organization can use the money or supplies you are donating however they see fit.
Know Your Limits
The amount of your total gross adjusted income that can be deducted as a charitable gift is either 20%, 30%, or 50%, depending on what organization you are giving to and what type of donation you are making.
The 20% rule applies to donations of capital gain property, meaning stocks, bonds, jewelry, cars, and land. The 30% and 50% rule is determined based on the type of organization and will be listed as part of their charity status.
It is important to note that you will never be able to deduct more than 50% of your adjusted gross income as charitable donations, so if you plan to make capital gain property donations that equal 20% of your income, you will only be able to deduct cash donations of 30%, to equal 50%.
To set a donation budget, you should look at your previous year's income and select a percentage you would like to give. You should keep in mind that the average rate of charitable donations for small businesses is 6% of their income, meaning you may never reach the limits on what is deductible.
Plan Your Giving
Once you have a budget for your yearly giving, you should make a concrete plan for which organizations you would like to support and when and how you will support them. You should keep in mind that the receipt of your gift must be issued within the tax year you want to use it, so it is a good idea to donate before December.
Track Your Giving
Just like your regular expenses and income, it is important to track your charitable contributions. This may be simple if you simply make cash contributions, but it can get more complex when you are donating physical property or your time. While your time is not deductible, the cost of supplies and transportation may be deductible. Talking with your accountant before you plan an event will let you know which receipts you need to mark as charitable contributions.
There are many reasons your small business may want to give back to the community you live in or a national organization. If you choose to make charitable donations, you should know your rights when it comes to deducting them from your tax liability. You should work with a professional who specializes in accounting services for small business owners to make sure you're maximizing your tax deductions.
Share14 August 2015
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