Here’s How To Make Your Charitable Donation a Business Expense
March 20th, 2015 at 11:41 AM
If you have a small business and operate as a Schedule C taxpayer or C Corporation, please continue to read this article.
You probably see ads all the time soliciting donations for charity telling you its a tax-write-off. Sometimes these claims are true and sometimes not. However, when you qualify for the full charitable deduction, you still may not receive its full benefit on your tax return. Because the IRS provides for a standard deduction of $6,300 for individuals, and $12,600 for married couples filing a joint return–so if your total itemized deductions do NOT exceed those amounts, you will not receive the benefit of your contribution.
Fortunately, as a business owner, you can convert your charitable contribution to a different type of deduction–an ordinary business expense. This will create a significant difference in your total tax savings.
When you deduct a contribution to charity as a business expense, the deduction is entered on your Schedule C or C Corporation return as a business expense. Let’s say your a sole proprietor (SP), and you make a $5,000 contribution to charity, and you earn $100,000:
- your self employment tax is reduced by $706
- Income tax by $1,162–assuming 25% tax bracket
In addition, this reduced your adjusted gross income, and can create another $250 in extra child care credits, and $625 in rental real estate deductions. This is a potential tax reduction of $2,743 on a $5,000 contribution!
You convert a charitable contribution into a business expense by earmarking the expenditure as a promotion or advertisement for the business. The tax law states the rule–Treat a contribution as a business expense if both:
- it is directly related to your business and
- made with a reasonable expectation of a commensurate economic return. That means, if you contribute $5,000 to charity, you expect to generate at least $5,000 of revenue from this expenditure. Please note, that the donation need not generate that much income-but you must have a reasonable expectation of such.
Here’s a few ways to make this work. First, make the donations as a way to attract customers to your business. Hold a fundraiser for the charitable organization-you pay for the location, food, and print materials. Make sure you that you are the known sponsor on this event, and how your services can benefit the attendees.
It’s a big win-win when you qualify your contributions as business expenses. The charity gets a donation, and you decrease your tax liability. However, there’s no free lunch here–you must follow and document why you expect the expenditure to create future business, and the approximate amount of such benefit.