Aristotle famously lamented that giving away money is easy, but giving it away wisely is another matter. For business owners, smart giving begins with an understanding of a few tax rules.
Your business form. The tax implications of giving to charity from your business depend on your form of entity. A regular C corporation can donate to charity and reduce taxable income accordingly. Sole proprietorships, partnerships, and S corporations cannot reduce taxable income by donating to charity. Instead, the charitable deduction passes to the owners’ personal return as an itemized deduction, where it can be subject to certain limitations.
The type of donation. If your donation results in the receipt of a benefit in return, such as advertising space in a nonprofit’s newsletter, the gift might be treated as a qualified business expense for any type of business. Special rules may also apply, such as those that encourage gifts of excess food inventory. All businesses can deduct qualifying donations of food inventory that are deemed “wholesome” and are used by the charity to further its exempt purpose.
Valuation issues. Non-cash donations of inventory by businesses can present tricky valuation issues. C corporations again have the advantage, with the deduction generally valued at basis plus one-half of the difference between the fair value and the corporation’s cost basis. The maximum deduction is twice the cost basis of the item. Other entity types are typically limited to the lesser of cost basis or fair market value, although donations of food are generally valued at the fair market value.
Records. Keep in mind that any gift of $250 or more will require a properly worded receipt from the charity before you file your return. Larger gifts might require an appraisal.
For more details on the tax rules for business charitable giving, contact our office.