No one really likes to think about paying taxes, but everyone likes to think about tax deductions. And for you small business owners who want to give back, but still need to mind your budget, my friend, Deb Meyer, has some great advice for you.
As you know, I’m a big fan of small businesses partnering with nonprofits and the for-profit social enterprise model. Each is a terrific way to make money and do good. So, if you fall into one of those two categories, Deb will give you the low-down on what charitable contributions look like for businesses, including examples to make it clear.
And for the nonprofits reading this post, she’ll also give you some tips for working with donors to keep them happy and informed.
Tax time doesn’t have to be your favorite time, but this will certainly make it easier. And if you can get a little reward for being kind, why not?
As a CPA financial planner, I’m well-versed in charitable giving strategies for individuals. If you give personally to a charitable cause and itemize deductions, there’s an added benefit of your generosity: a tax deduction!
But what if you’re a social enterprise or small business owner who wants to use the business to give back? The rules aren’t quite as straightforward as they are for individuals. Even nonprofits can benefit from learning these rules and share them with potential donors.
Definition of Business Expense
From a tax standpoint, your business expense must be ordinary and necessary. Ordinary means the expense is common and widely accepted in your business. On a related note, a necessary expense is one that is helpful and appropriate for your business.
Let’s dive further into IRS Publication 535 for guidance on whether charitable contributions are deductible business expenses. Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments aren’t charitable contributions or gifts and are directly related to your business. It is a bit counterintuitive, don’t you agree?
As an individual, you make a charitable contribution out of the kindness of your heart and may receive an additional tax benefit as a bonus. Within a corporate environment, generosity is not the name of the game. Rather, there should be a business motive behind the transaction.
3 Examples of Deductible Business Expenses
EXAMPLE #1:
Your roofing business wants to run an advertisement in your church’s bulletin and the cost is $1,000 for the year. You pursue the ad because your business is looking to grow its customer base. The business is eligible for a $1,000 tax deduction, just like any other marketing expense.
EXAMPLE #2:
One of your clients runs an annual golf tournament to honor the life of her deceased son. You, a small business owner, are invited to attend the golf tournament. You buy a single ticket to play in a foursome. Is your ticket cost tax deductible on the business return?
Probably not, unless you can provide a reason for the business purpose behind the event.
Rather, take your “business” hat off for a moment and see if this qualifies for a personal charitable contribution. Look at the value received from your ticket. The tax-deductible amount is the portion in excess of the value received (i.e. if the ticket cost is $80 and value received is $50, you could claim $30 of charitable contribution on Schedule A of your personal tax return).
The better option in this scenario? Your company could sponsor a hole or provide an item for the silent auction. That cost is fully tax deductible for the business because sponsorship is a marketing tool.
EXAMPLE #3:
Your brick-and-mortar store is suffering due to lack of foot traffic. The local Chamber of Commerce unleashes a solid plan to increase the number of visitors within a one-mile radius of your business. Your business gives $5,000 to support this excellent initiative. There is a marketing purpose behind this expense, so it is considered tax deductible.
Commonalities Among Deductible Business Expenses
In each of the examples above, there is a common thread for the small business owner to claim a tax deduction: advertising. For-profit businesses are in business to make money.
Advertising or marketing expenses are deductible because they increase brand awareness. Sales increase as more people learn of your business service or product.
Just because you own a for-profit business does not mean you need to leave your philanthropic heart at the door. In fact, profitable small business owners can give at even greater levels than traditional employees. Your business has unlimited earnings potential!
Additionally, as demonstrated in the second example, a charitable contribution with no business purpose may be tax-deductible personally.
Claiming Personal Charitable Deductions
Unless your business is classified as a C Corporation, the underlying business profit eventually flows to your personal U.S. income tax return. Sole proprietors file Schedule C of the federal form 1040, while business partners in a partnership generate Schedule K-1s from their business tax return.
One of my clients runs a pizza franchise, and they periodically donate old inventory to a nonprofit organization. The business doesn’t receive any publicity from these donations, so we do not deduct the cost of donated inventory on the business tax return. Nonetheless, we take the value of the charitable contribution and report it on Schedule A of the business owner’s personal tax return.
How the TCJA Impacts Charitable Contributions
Sweeping U.S. tax reform, known as the Tax Cuts and Jobs Act, passed late in December 2017 and took effect for the 2018 tax year. This groundbreaking law welcomed a host of tax-related changes, most notably the increase of the standard deduction on personal tax returns to $12,000 for individuals and $24,000 for married couples filing jointly.
Although actual figures are not yet in, the Joint Committee on Taxation estimates that only 12% of U.S. taxpayers will itemize deductions for the 2018 tax year.
This is especially concerning to nonprofits who rely on financial support from individuals and businesses alike. You no longer receive a personal tax break for charitable contributions if you take the standard deduction. While that won’t deter all families from giving, it may result in lower overall contributions.
Thus, BIGGER IS BETTER. There are smart ways for individuals to stack their charitable contributions in one tax year (to get the deduction) and then decrease their giving in the subsequent tax year.
Alternatively, donor advised funds are great tools for families who want to give substantially to one or more charities over several years and ensure they receive a tax deduction. Consult this article for additional strategies to maximize personal charitable contributions.
Action Items for Nonprofits
What is a nonprofit organization supposed to do with this information?
First and foremost, educate.
Help current and potential donors understand the rules around charitable giving—both personally and within a for-profit business structure. Provide concrete examples for them, specifying when it may be OK to claim a tax deduction.
If you’d rather not provide examples for liability reasons, point donors to this article or to a qualified tax or financial professional. This professional should be carefully vetted in advance to provide deeper guidance on the nuances of charitable contributions.
You Can Be Kind and Still Get a Tax Break
Knowledge is power. It pains me to tell a new client that his or her business charitable contribution does not qualify as a tax deduction. There are ways to give back and legitimately claim the tax break, but you must know the rules.
Having read this article in its entirety, you now understand the basics. Now go and share them!
Deborah L. Meyer, CPA/PFS and CFP®, is a fee-only financial planner and the author of Redefining Family Wealth: A Parent’s Guide to Purposeful Living. Deborah is also the owner of WorthyNest®, an independent advisory firm dedicated to helping parents build wealth. She is a recipient of the 2018 AICPA Standing Ovation Award for Personal Financial Planning. Deborah has been featured in The Wall Street Journal, Forbes, Yahoo! Finance and CNN Business and is a regular contributor to Kiplinger. Outside of work, Deborah spends time with her husband, Bryan, and three sons.
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I’m Kristi Porter, and I help cause-focused organizations understand and execute effective marketing campaigns so they can move from stressed to strategic. Your resources may be limited, but your potential isn’t. Whether you’re a nonprofit, social enterprise, or small business who wants to give back, I’ll show you how to have a bigger impact.