Small and midsized businesses are increasingly committed to making charitable donations and receiving tax deductions for their philanthropic efforts. According to a survey of small business owners released in December 2015 by Alignable, "47 percent of small businesses (SMBs) or small-business owners (SBOs) plan to give more to charity this year, 49 percent plan to donate the same amount and 90 percent of donations are to support local causes." Most intend to donate cash, while others will give in the form of goods and services.
Do you expect to make charitable donations in 2016? Here's a brief overview of what you should know.
Only specific types of donations and organizations qualify for a tax deduction, so be sure to research whether the causes and non-profit organizations you want to help qualify. Most organizations can provide a determination letter from the IRS proving their exempt status, or you can consult the IRS online search tool Exempt Organization Select Check.
The IRS regards the following as eligible donations: cash, charitable event sponsorship, goods or services. "By itemizing your deductions, you can write off any time your business spent volunteering," notes Madie Hodges at Kabbage. "In general, you can get deductions of up to 50 percent on your adjusted gross income when you follow the tax code closely and incorporate charitable giving into your business model." Be sure to itemize every deduction you wish to take.
For cash contributions, use Form 1040, Schedule A on your personal tax return, itemizing each deduction. As for corporate donations, tax expert Bonnie Lee at Fox Business News notes that "any donations made at the S Corporate or partnership level flow out as a special line item on your Schedule K-1 and end up on Schedule A of your individual income tax return."
For noncash contributions, fill out Form 8283, "when the amount of [your] deduction for all noncash gifts is more than $500."
Contributions are only deductible in the tax year in which they're made. If, for example, you pledge a donation of $600 in August, but pay only $300 by Dec. 31, the deduction is $300. Any contribution of $250 or more must be accompanied by written acknowledgment from the recipient, detailing the date and amount of the donation.
Always keep records of contributions in the form of canceled checks, bank/credit card statements or payroll deduction records in case of an IRS audit.
Philanthropic efforts help raise awareness of a particular cause while boosting the image of your business in the community. Let people know by posting on your website and social media platforms. You can also request the recipient organization highlight your contribution in their own outreach efforts.
Employees can also take pride in being connected to charitable activities. According to the Small Business Administration, employees "who have a favorable impression of their company's philanthropic program are five times more likely to remain with their employer."
For more information on the taxability of making charitable donations, consult a qualified tax advisor.
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