Can a Business Donate to a Church & Get a Deduction?

Businesses often consider making donations to support causes they believe in, and churches are common recipients of such generosity. While businesses can generally donate to churches, securing a tax deduction for these contributions involves navigating specific rules and requirements. This article will clarify the conditions under which a business donation to a church may be tax-deductible.

Recipient Eligibility

For a business donation to a church to be tax-deductible, the church must meet Internal Revenue Service (IRS) criteria as a qualified organization. This means the church operates as a 501(c)(3) organization. Churches are automatically considered tax-exempt under IRC 508 and do not need to apply for a formal determination letter from the IRS to receive this status, unlike most other nonprofit organizations.

Despite this automatic exemption, the church must still operate exclusively for religious, charitable, or educational purposes and adhere to other 501(c)(3) requirements, such as not benefiting private individuals or engaging in political campaign activities. Businesses must ensure the church’s eligibility before making a donation for which they intend to claim a deduction. While churches may not appear on the IRS Tax Exempt Organization Search tool (TEOS), donors can verify their status by requesting a copy of a determination letter if one exists, or by contacting the church directly.

Contribution Types and Tax Treatment

Businesses can contribute to churches in various forms, and the tax treatment differs based on the type of contribution. Cash contributions are a common form of donation, and these are deductible up to certain limits of the business’s taxable income. For any cash contribution, businesses must maintain records such as bank statements, canceled checks, or written communication from the church.

Property contributions have more nuanced rules. If a business donates ordinary income property, such as inventory, the deduction is limited to the lesser of the property’s fair market value or its basis. For capital gain property, like appreciated stock or real estate held for more than one year, the deduction is the fair market value of the property. However, special rules apply, and the deduction amount may be reduced if the property’s use by the church is unrelated to its tax-exempt purpose.

Services donated by a business or its employees, such as accounting, legal, or construction work, are not deductible as charitable contributions. However, any unreimbursed out-of-pocket expenses incurred by the business or its employees while providing these services, such as travel costs or materials, may be deductible.

Businesses should be aware of quid pro quo contributions, where a donation is made but the business receives a benefit in return, like event tickets or advertising. In such cases, the deductible amount is limited to the portion of the contribution that exceeds the fair market value of the goods or services received. If the contribution is over $75 and a benefit is received, the church must provide a written statement estimating the value of the goods or services provided.

Documentation Requirements

Proper documentation is necessary for a business to substantiate its charitable contributions for tax purposes. For cash donations, a business must keep bank records like canceled checks or bank statements, or a written communication from the church. If a cash contribution is $250 or more, a contemporaneous written acknowledgment (CWA) from the church is required. This CWA must include the amount of cash and indicate whether any goods or services were provided in return, along with a good faith estimate of their value.

For non-cash donations, a CWA from the church is required for contributions of $250 or more. If the value of the property donated exceeds $500, businesses must complete and attach IRS Form 8283, “Noncash Charitable Contributions,” to their tax return. This form requires details about the property, its fair market value, and how that value was determined.

For non-cash contributions valued at over $5,000, a qualified appraisal by a qualified appraiser is necessary, and Form 8283 must be completed and signed by the appraiser and the donee. Businesses must retain all relevant documentation, including receipts, appraisals, and correspondence, for their records in case of a tax audit.

Impact of Business Structure

The way a business deducts charitable contributions to a church depends on its legal structure. C corporations can directly deduct charitable contributions on their corporate tax returns. These deductions are limited to 10% of the corporation’s taxable income. Any contributions exceeding this 10% limit can be carried forward and deducted in the next five tax years, subject to the same limitations.

For pass-through entities, such as S corporations, partnerships, and limited liability companies (LLCs) taxed as partnerships, the charitable contribution is not deducted at the entity level. Instead, the contribution is passed through to the individual owners (shareholders, partners, or members) on their Schedule K-1 forms. These owners then deduct their share of the contribution on their personal income tax returns, on Schedule A, subject to individual charitable contribution limitations.

Sole proprietorships treat donations to churches as personal charitable contributions. A sole proprietor cannot deduct these contributions as a business expense on Schedule C. The deduction is claimed on Schedule A of their personal tax return, provided they itemize their deductions. The tax benefit for sole proprietors and owners of pass-through entities depends on their individual tax situation and whether itemizing deductions is more beneficial than taking the standard deduction.