Tax Deduction Rules for Corporation Donations

For a corporate donation to be tax-deductible, it must go to a qualified 501(c)(3) organization, such as a religious, educational, charitable, scientific, or literary group. The tax code allows companies to reduce their taxable income through these contributions. This process involves specific rules regarding deduction limits, how donations are valued, and what proof is required.

Calculating the Charitable Deduction Limit

A corporation’s charitable deduction is limited to 10% of its taxable income for the year. This income figure is calculated before taking the charitable deduction itself and before deducting any net operating loss (NOL) or capital loss carrybacks.

If a corporation’s donations exceed the 10% threshold, the excess amount can be carried over for the next five tax years. These carried-over donations are subject to the same 10% limit in the years they are used.

For example, a corporation with $500,000 in taxable income has a deduction limit of $50,000. If this corporation donates $70,000, it can deduct $50,000 in the current year. The remaining $20,000 can be carried forward and potentially deducted over the next five years, subject to the 10% limit in each of those years.

Valuation of Donated Property

For cash donations, the value is the amount of money given. The rules are more complex for noncash property, which is divided into two categories that determine the deductible amount.

Ordinary Income Property

Ordinary income property includes assets that would generate ordinary income if sold, such as inventory, accounts receivable, or capital assets held for one year or less. The deduction for this property is generally limited to its basis, which is its cost to the corporation. This rule prevents a business from receiving a deduction for the appreciated value or profit margin that was never realized as income.

A special rule allows C-corporations an enhanced deduction for donating food inventory to organizations serving the ill, needy, or infants. The deduction is the lesser of the food’s basis plus half its potential profit, or twice its basis. The total deduction for these food donations is capped at 15% of the corporation’s taxable income.

Capital Gain Property

Capital gain property includes assets that would produce a long-term capital gain if sold, such as stocks, bonds, or real estate held for more than one year. For these donations, the deduction is typically the fair market value (FMV) of the property on the date of contribution. This allows the corporation to deduct the full appreciated value of the asset without having to recognize the appreciation as taxable income.

However, the deduction is reduced to the property’s cost basis if the asset is tangible personal property and the charity’s use of it is unrelated to its tax-exempt purpose. For example, a company donating a vintage car to a university would have its deduction limited to the car’s basis unless the university used it for educational purposes, like in an automotive program.

Substantiation and Documentation Rules

Properly documenting charitable contributions is required to claim a deduction, and the IRS has specific rules based on the donation’s value and type. Failure to maintain correct records can result in the deduction being disallowed.

For any single contribution under $250, a corporation must keep reliable written records, such as a canceled check, bank statement, or a receipt from the charity. For donations of $250 or more, the corporation must obtain a contemporaneous written acknowledgment from the organization before filing its tax return. This document must state the cash amount or describe the property donated and note if any goods or services were provided in exchange.

For noncash property donations over $500, the corporation must file Form 8283, which requires details about the donated property and the recipient organization. If a single noncash donation or group of similar items exceeds $5,000, the corporation must also obtain a qualified appraisal. The appraiser must complete the relevant section of Form 8283.

Impact of Corporate Structure on Donations

The tax treatment of charitable contributions differs between a C-corporation and an S-corporation, which alters where the deduction is claimed. A C-corporation takes the charitable deduction directly on its tax return, Form 1120. The donation reduces the corporation’s profits before the corporate income tax is calculated.

S-corporations handle contributions differently because they do not pay federal income tax. The contribution amount is passed through to the shareholders on a pro-rata basis via Schedule K-1. Each shareholder then includes their portion of the donation on their personal tax return. This deduction is subject to individual adjusted gross income (AGI) limitations, which can be up to 60% for cash contributions.