This article was fact-checked and verified by Katherine Varraveto, CPA. However, this article does not constitute tax advice and was written for educational purposes. For actual tax advice please consult your own CPA.
- What is a tax break?
- Who gets a tax break?
- Do all businesses get tax breaks for donations?
- What type of business do you run?
- Are donations tax-deductible for companies?
- How much does a charitable donation reduce taxes?
- Donating a percentage of your profits to charity
- Can an LLC write off charitable donations?
- Can businesses deduct donated services?
- How do I know if my donation is deductible?
- What if I get audited, and I don’t have receipts?
- Key takeaways
- How can Spiral help with your giving & financial goals?
Donating to charity is a noble act, no doubt, and while giving to charity seems a lot more like a personal decision, it has also been adopted as a business decision with the aim of:
- Giving back to the community
- Making bearable for the people in need
- Offering a helping hand during disasters
But do all businesses get tax break for their donations? And how can you or your business qualify for a tax break?
While donating is a voluntary act, several rewards are available to donors that encourages them to do more, some of these rewards are actively planned (tax breaks) while others are unplanned and gotten as a result of every charity act.
Although not necessarily strategic tax moves, these unplanned donations can also be quite valuable to a business.
When both these planned and unplanned rewards are considered, charitable acts such as donating, volunteering etc., comes with the following benefits.
- Increased social responsibilities:
When you give to charity, through different means, either through cash donations, volunteering or product donations, you give your business a socially responsible business status;
- A means of giving back to the local community:
Giving back to the community in which you make your money is always a good idea. It sends a message of support that you are not only serving them via your business but also supporting the community’s more specific needs.
- A way of rewarding customers for their loyalty:
Some customers are very loyal to whatever brand they choose, these customers deserve to be rewarded for their loyalty by giving back to them or giving to any charity they choose, this helps to rejuvenate their loyalty towards your brand.
- A unique means of free but effective company advertisement:
Doing charity works gives your business a particular type of publicity that paid advertising does not – and this added publicity comes as a byproduct to the donation!
When customers or potential customers see your charitable work, some may automatically develop an emotional attachment to your brand, the loyalty is deepened if the donation goes to a charity they are passionate about.
- Tax breaks for donations:
As a business, when you donate to charity and you itemize your contributions, you are eligible for varying levels of tax deductions, depending on the type of company you have. A reduced tax burden is always a welcome idea.
What is a tax break?
Let’s say; a Sole Proprietorship business makes a donation which is of the same value as 10% of the company profit to a qualified charity.
The company owner, who gets the profit or incurs the losses from the business is eligible to complete Schedule A, for a tax break equivalent to the amount donated. This here, is a tax break.
Who gets a tax break?
Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040).
Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.
Do all businesses get tax breaks for donations?
Yes, but the tax break received depends on facts and circumstances. Cases are different; here’s why: as a business entity, you are eligible for tax deductions at varying levels, depending on the type of cooperation (Sole Proprietorship, Partnership, Corporation, or an LLC) you run and provided you meet some other criteria spelt out by the IRS.
These criteria include but not limited to; donating to a qualified charity, the amount donated and the time of donation.
What type of business do you run?
There are different types of businesses, and they each qualify for varying levels and types of tax deductions.
- Sole proprietorship:
An individual solely owns this type of business. The tax liability is the responsibility of the sole owner to settle as he/she receives all the profits or losses from the business.
a collaboration between two or more business partners; here, the multiple owners, rather than the business directly, are taxed on the profits or losses they receive from the business.
also called C Corporation, is a type of business wholly separate from its owners; the company can be taxed or held legally responsible separate from its owner(s).
- S Corporation:
S corporations elect to pass business attributes such as losses, income, tax, and credit to the shareholders. The flow of income is reported on the individual tax returns. What qualifies a business as an S Corporation? See here.
- Limited Liability Company (LLC):
In an LLC, baring a situation where the owners asks the company is treated as a corporation for tax purposes, the owners are not liable for the company’s debts or liabilities; however, their profits and losses are passed on to the owners and are taxed from there. LLCs basically combine the characteristics of sole proprietorship and partnership while operating as a corporation.
From the above, you can assess your type of business and the type of taxation of your business. After this, let’s talk about the level of tax deductions due to the different kinds of business.
Are donations tax-deductible for companies?
Companies can get donation rebates for their cash donations that exceed the standard deduction up to 30%, these figures may fall to 20%, 15% and 10%, depending on the type of corporation and the amount donated. Provided the donations are made to qualified charities.
If you run a sole proprietorship or a partnership, you can get a 100% tax deduction from your charitable cash giving as a company in 2020 and 2021; this is because the profits or losses are passed on to you, and the deductions are made from there.
This is not the case with non-cash donations or donations from other types of business. Non-cash donations are eligible for a 50% deduction.
How much does a charitable donation reduce taxes?
To determine how much your charitable giving reduces your company taxes, you can check the IRS guidelines for tax deductions available to your specific type of company.
For a sole proprietorship, since your profits and losses are transferred to you and you are then taxed on your income, you are eligible to deduct on Schedule A up to 100% of cash donations (temporary legislation) or 60%, 30% and 20% of donations, depending on the type of donation or the type of charity receiving the donation.
The same goes for partnerships, S corporation shareholders and LLCs, when the profits and losses are passed on to the owners or shareholders.
It is, however, different in the case of C corporations. The C corporation’s earnings are taxed at the business level, and the dividends paid to the shareholders are taxed again at the individual level.
C corporations must file IRS Form 1120 to report income and losses. C corporations are eligible to claim not more than 10% of their charitable giving as tax deductions.
Donating a percentage of your profits to charity
Deciding what percentage of your profits should go to charity is personal. According to a study conducted by American Express and The Chronicle of Philanthropy, the average American business donates an average of 6% of its profit to charity.
However, the amount of the tax break depends on the amount given as well as the amount of business income. Setting aside a percentage of your profit will help to organize and document your charitable giving without going through too much stress.
Can an LLC write off charitable donations?
LLCs can be taxed in two ways: they are taxed from their shareholders’ income or are taxed as a corporation; in both cases, they are eligible for charity deduction.
If they are taxed as a corporation, their charitable contributions can be deducted separately from other deductions by filing IRS form 1120. If an LLC is taxed as a corporation, it can claim up to 10% in charitable tax deductions.
Can businesses deduct donated services?
Non-financial donations including properties can be deducted in addition to financial contributions. Services donated, however, are not deductible.
Instead, the expenses incurred in the process of offering such services can be deducted.
Expenditures like gas, materials used, change in machinery parts etc., can be curated for a deduction.
A company that decides to offer its staff the opportunity to volunteer to charities of their choices cannot claim deductions on their hours doing charity work.
Neither can it claim deductions on the amount of revenue lost in the process.
What can be claimed are the logistics support offered, money spent on refreshments, materials bought and used for the charity work.
It is vital to obtain a fair market value of each material and receipt or evidence adequately documented.
How do I know if my donation is deductible?
After deciding to donate:
- Ensure the charity you are donating to is qualified under IRS Form 501(c)(3).
- Keep receipts and other evidence of your donations.
- Obtain a fair market price of non-financial donations.
- Itemize your donations on IRS Schedule A.
- For property donations above $500, obtain and complete IRS Form 8283.
After going through the above processes, your charitable donations can be qualified for deductions.
What if I get audited, and I don’t have receipts?
In situations where your receipts are lost, you should obtain a written acknowledgment from the charities to serve as evidence of your donation.
If you’re looking for an easy way to track donations for tax returns, try new banking¹ services like Spiral that are dedicated to making giving easy for their customers.
Spiral’s mobile app tracks all your donations so you can easily see who you’ve given to, and how much.
With Spiral, you can give effortlessly to 1 million+ charities² AND get your donations matched dollar-for-dollar, up to $150 per year³. Make your giving go further!
Donating to charities has so many levels of impact and value, both to others and yourself. These donations, depending on the status of the receiving charity, can be eligible for a certain level of tax deductions.
And this tax deduction varies from 30% to 10%, depending on the type of corporation the business is. Ensure you keep your receipts or evidence of every donation intact.
- Depending on the type of business you do, you are entitled to certain levels of tax breaks for your donations.
- You can’t claim deductions on donated services except on the expenses incurred while offering the services.
- LLCs and other company types are eligible for tax deductions, depending on some criteria that have to be fulfilled.
- Without receipts, you can obtain written acknowledgements from the charities to serve as proof of your charitable donations: However, it’s better to get your receipts and keep them safe for this purpose.
How can Spiral help with your giving & financial goals?
Spiral is the pioneer of the Impact-as-a-Service™ platform that helps banks and financial institutions easily embed sustainability, social impact, ESG, and CSR into their businesses. Their mission is to empower 10,000+ U.S. financial institutions and millions of people to contribute to a better world.