How to Properly Tithe as a Business Owner

As a business owner considering tithing, understanding the financial and operational implications is important. Many business owners aim to integrate tithing into their financial practices, and this guide provides practical steps for managing this process. It focuses on how to determine the tithable amount, structure payments, manage accounting and tax aspects, and maintain proper records.

Identifying Tithable Business Income

Determining the income base for tithing is a primary consideration for business owners. A key distinction involves whether to tithe on gross revenue or net profit. While gross revenue represents total sales before any deductions, net profit is the amount remaining after all business expenses are paid. Tithing on net profit is generally considered a more practical approach as it aligns with the actual financial gain of the business.

For business structures like sole proprietorships, where business and personal finances are often intertwined, tithing typically occurs on the owner’s personal income, such as owner’s draws or distributions. In contrast, entities like LLCs, S-Corporations, and C-Corporations have clearer distinctions between business income and owner compensation. For these entities, tithing might be calculated on the profit distributed to the owner or, in the case of a C-Corporation, potentially as a corporate charitable donation. Defining “income” for tithing purposes means identifying the actual financial benefit derived from the business, ensuring the calculation base is consistent and reflective of the business’s true financial performance.

Structuring Tithing Payments

Once the tithable income is determined, the next step involves making the payments. Business owners have several options for transferring funds, which can include direct payments from a business bank account or transferring funds to a personal account first, then making the payment from there. The chosen method should align with how the tithable income was defined in the prior step, particularly for pass-through entities where business profits become personal income.

Setting up regular tithing payments, such as scheduled transfers, can help ensure consistency and simplify the process. For instance, an owner might schedule a monthly transfer from their business operating account to their personal account, then immediately initiate a separate transfer to the recipient organization. This systematic approach can aid in cash flow management, preventing large, unexpected outflows that could strain business operations.

Accounting and Tax Treatment

Understanding the accounting and tax implications of tithing payments is important for business owners. Generally, tithing is considered a personal charitable contribution and is not a deductible business expense for federal income tax purposes. This means that for sole proprietorships, partnerships, and S-corporations, the tithing amount is treated as a distribution to the owner and then deducted on the owner’s personal tax return if they itemize deductions.

Individual charitable contributions can be deducted on Schedule A (Form 1040) as an itemized deduction, typically limited to 60% of the taxpayer’s Adjusted Gross Income (AGI) for cash contributions to qualified public charities. C-Corporations have different rules; they can deduct charitable contributions directly, but these deductions are generally limited to 10% of their taxable income. Proper bookkeeping entries are essential to distinguish between owner’s draws or distributions, which are not business expenses, and legitimate business expenditures. For pass-through entities, an owner’s draw for tithing would be recorded as a debit to an Owner’s Draw account and a credit to the cash account, reflecting a reduction in owner’s equity rather than an expense.

Maintaining Tithing Records

Accurate and organized record-keeping is essential for tithing activities. Business owners should maintain specific documents to support their contributions, which include bank statements, copies of cancelled checks, and electronic transfer confirmations. Documentation from the recipient organization, such as contribution statements or receipts, is also important, especially for donations of $250 or more, as the Internal Revenue Service requires written acknowledgment from the qualified organization.

These records are important for personal financial tracking, ensuring that the owner has a clear overview of their giving. Furthermore, they are necessary for tax preparation, allowing the owner to accurately claim any eligible deductions on their personal tax return. Organizing these documents securely, whether in physical or digital format, helps demonstrate compliance with tax regulations and provides a reliable history of charitable contributions.