When it comes to charitable donations, there are various ways businesses can approach it. One common question is about providing services to charities and how that contribution works in such cases. It's important to understand that simply providing services to a charity may not result in a deduction.
Businesses often incur costs to generate the charitable work — those costs are deductible. But, instead of invoicing the charity for the full amount of work and then taking a charitable donation by not collecting the payment, it's better to allow the expenses to happen and not charge for the work. This is considered a pro bono arrangement and has better tax implications.
As with anything, good documentation is extremely important.
The level of charitable donations depends on the business and its financial situation. It's generally a good idea for businesses to donate something back to the community as it helps generate new business and build a positive reputation.
From a tax standpoint, it's important to differentiate between promotional donations and actual charitable donations. If a business donates money to a charity and expects some form of return, it's considered promotion rather than a charitable donation. Promotion, such as having the business's name displayed, has better tax consequences compared to charitable donations.
The choice between local or non-local charities depends on the business's nature. If the charity is related to the industry or customer base, it is a good idea to participate and gain exposure.
On the other hand, supporting the local community is a great way to build goodwill and reputation, especially for businesses that rely on local business. It's also important to consider personal connections and experiences when choosing who to donate to.
From a tax standpoint, pass through business owners need to be itemized filers to claim deductions for charitable donations. This means that all tax expenses, including mortgage interest, investment interest, and charitable donations, must accumulate to a certain amount, usually around $10,000, to be eligible for deductions.
Most businesses are flow-through entities, meaning their business income flows into their personal tax returns, where charitable donations affect personal itemized deductions. However, C Corporations are standalone entities, and their charitable aspects stay within the corporation.
In conclusion, businesses should consider keeping charitable donations local to fulfill the true purpose of charity. While there are tax benefits, the goal should not be to expect something in return. It's important to plan donations strategically, especially considering the standard deduction and stacking donations over multiple years to maximize tax benefits.
Every tax decision should be part of a larger plan, whether it's a business or personal decision. Be intelligent and thoughtful about your charitable donations, as they can have a significant impact on your taxes.
Planning your donations can be a lot to manage throughout the year and we can help. Use the Let’s Chat button and see how Kaizen CPAs + Advisors can help you.