The pandemic has created a great need in a number of communities and for a number of special causes and organizations. But charitable giving is a perennial practice with an unending number of people and causes in need. According to an American Express and The Chronicle of Philanthropy report last year, charitable giving by small businesses is on average 6% of their profits.
If you want to give, there are many ways to do it. And you may even get a tax benefit from your philanthropic activities.
What you can donate
The range of things your business can donate are limitless. They include not only money, but also inventory, used equipment, and even services.
Some businesses have incorporated charitable giving into their business model, setting aside a certain percentage of sales or profits for specific causes. For example, sellers on eBay may use eBay for Charity to include information in their listings that a set percentage of each sale goes to a specific charity. They’ve collectively raised more than a $1 billion since 2003.
Cause marketing. This is a growing trend in which for-profit businesses incorporate supporting a specific charity or cause in their business model. For example, Bombas donates one pair of socks to homeless shelters for each pair purchased.
If you want to incorporate cause marketing into your business activities, you can DIY. You may want to use website, such as Causely, that can help you promote your charitable activities.
How much you can deduct
Cash donations in 2021 are deductible up to 100% of adjusted gross income (25% of taxable income for C corporations). Donations of capital gain property are based on their fair market value (FMV). Donations of ordinary income property (property that would have resulted in ordinary income to the business if it had been sold) may result in little or no deduction. If its tax basis (initial cost minus bonus depreciation, first-year expensing, and regular deprecation) is zero, then the full amount on a sale would have been ordinary income. This means that if you donate business equipment that’s been fully written off, there’s no tax deduction for the donation.
Special rules for inventory donations. Generally, if you donate items from your inventory, the deduction is limited to the fair market value (FMV) of the property on the date of the contribution, reduced by any gain that would have been realized if you had sold the property at its FMV instead of donating it. Be sure to remove from opening inventory any contributions you make (namely, the costs for the donated property included in prior years). These costs are not part of the cost of goods sold for the year in which the contribution is made.
Enhanced deductions of inventory donations apply to:
- Donations for the ill, needy, or infants. If a C corporation donates inventory that will be used for the care of the ill, the needy, or infants, add to the deduction 50% of the difference between the basis and the FMV of the inventory (but not more than 200% of the basis of the property).
- Certain donations of scientific property and computers. The same enhanced deduction applies when a C corporation (other than a personal holding company) donates scientific property to a higher education institution for use in research.
- Food inventory. For 2021, there’s a special deduction rule for donations of food inventory by any type of business entity. Usually, a deduction is limited to 15% of taxable income. For 2021, the cap is 25% of taxable income. The food must be wholesome and meet certain requirements (see IRS Publication 526).
You cannot deduct the value of your time. For example, a dentist I know provides free dental services to a women’s shelter. She can’t deduct what she would have charged for this service.
What you must do to nail down deductions
To claim any deduction, you must substantiate your donation. Make sure to receive written acknowledgments for any donations of $250 or more. Keep checks or other proof of smaller donations. Substantiation rules apply to all types of business entities. Find more in IRS Publication 526.
Donations by C corporations reduce their taxable income. Donations by any other type of entity to not impact their net income. Charitable contributions are separately stated items that pass through to owners who report them on their personal tax returns. Donations in excess of $300 ($600 for a married couple filing jointly) requires individuals to itemize if they want to receive a tax benefit from them.
“Think of giving not only as a duty but as a privilege.” -- John D. Rockefeller.
Whatever you give and whatever you do, it matters to someone. Tax breaks are a minor benefit from giving. Helping others is the greater good.