How to Donate to Charity as a Business

Businesses frequently engage in charitable giving, contributing to causes important to their values and communities. This generosity offers dual benefits, supporting worthwhile organizations while potentially providing tax advantages. Understanding the process and specific considerations for businesses donating to charity is important for maximizing both impact and applicable benefits. This guide provides an overview of how businesses can effectively contribute to charity.

Identifying Qualified Charitable Organizations

For a business’s charitable contribution to be tax-deductible, the recipient organization must be recognized as a “qualified charity” by the Internal Revenue Service (IRS). This typically means the organization holds 501(c)(3) status under the Internal Revenue Code. These organizations are generally established for religious, charitable, scientific, literary, or educational purposes.

Businesses can verify an organization’s qualified status through the IRS Tax Exempt Organization Search tool, which allows searches by name or Employer Identification Number (EIN). This database helps confirm if a charity is legitimate and if donations are tax-deductible. Confirming tax-exempt status before donating is important. Organizations that generally do not qualify for deductible contributions include political organizations, individuals, or foreign organizations without a U.S. presence.

Making Various Types of Business Contributions

Businesses can contribute to qualified charities in several forms, each with distinct considerations for tax purposes. Cash contributions, involving direct money donations, are the most straightforward to track and value.

Businesses can also donate property, which includes non-cash assets such as real estate, equipment, or securities. The tax treatment of property contributions depends on whether the property is considered ordinary income property or capital gain property. Ordinary income property, like inventory held for sale, typically limits the deduction to the lesser of the property’s fair market value (FMV) or its cost basis. Capital gain property, such as appreciated stock held for over a year, may allow a deduction based on its fair market value. Special rules apply to inventory contributions, where the deduction is generally limited to the cost basis of the inventory.

The value of services performed by a business or its employees for a charity is not deductible. While the time and expertise themselves cannot be deducted, out-of-pocket expenses incurred while providing those services may be deductible. This includes costs such as travel, supplies, or materials directly related to the volunteer work.

Claiming Business Charitable Contribution Deductions

Charitable contribution deduction methods and limitations vary based on the business’s legal structure. C corporations deduct charitable contributions directly on their corporate income tax return (Form 1120). These deductions are generally limited to 10% of the corporation’s taxable income. Contributions exceeding this 10% limit can be carried forward and deducted in the next five tax years.

For pass-through entities, such as S corporations, partnerships, and Limited Liability Companies (LLCs) taxed as S corporations or partnerships, the charitable contribution deduction does not occur at the business level. Instead, the deduction “passes through” to the owners’ individual tax returns. Owners of these entities claim their share of the contributions as an itemized deduction on Schedule A (Form 1040) of their personal tax returns. The deductibility for individual owners is subject to adjusted gross income (AGI) limits, typically 50% or 30% of AGI, depending on the type of contribution and the recipient organization.

Sole proprietorships also operate as pass-through entities for tax purposes. Charitable contributions made by a sole proprietorship are claimed by the owner on their personal Schedule A (Form 1040) as an itemized deduction. Similar to other pass-through entities, these deductions are subject to the individual AGI limitations.

Valuation and Record-Keeping for Contributions

Accurate valuation and record-keeping are essential for substantiating charitable contributions and claiming deductions. For non-cash contributions, determining the fair market value (FMV) is crucial. FMV is the price at which property would change hands between a willing buyer and seller, both having reasonable knowledge of relevant facts. The IRS provides guidelines for determining FMV, considering factors like cost or comparable sales.

Appraisals are often required for non-cash contributions, particularly for items or groups of similar items valued over $5,000. A “qualified appraisal” must be prepared by a qualified appraiser, and an appraisal summary (Form 8283, Section B) must be attached to the tax return where the deduction is claimed. For artwork valued at $20,000 or more, or for gifts of property exceeding $500,000, a copy of the appraisal must be submitted with the tax return. Failure to comply with appraisal requirements can lead to the denial of the charitable deduction.

Specific record-keeping requirements apply to different contributions. For cash contributions of any amount, businesses must keep bank records, such as canceled checks or bank statements, or a written communication from the charity. For cash or property contributions of $250 or more, a contemporaneous written acknowledgment (CWA) from the charity is required. This acknowledgment must include the amount of cash, a description of any non-cash property, and a statement indicating whether any goods or services were provided in return, along with their estimated value.

For non-cash contributions exceeding $500, IRS Form 8283, “Noncash Charitable Contributions,” must be completed and attached to the tax return. For contributions over $500 but less than $5,000, records must also detail how the property was acquired, the approximate date of acquisition, and its cost basis. For contributions of $5,000 or more, in addition to the qualified appraisal, businesses must retain records describing the property, its condition, the date of contribution, and any restrictions on its use. These records are crucial for substantiating the deduction in an IRS inquiry.