As a small business owner, one of the scariest parts of the business can be filing taxes — especially if you’re unprepared. If you’ve ever sat at your desk just before the filing deadline with a stack of receipts (paper or digital) and a sense of panic, you know what it’s like. Why not let this year be the year you stop panicking about filing taxes? Today we’ll break down how to make, record and deduct charitable donations so that when tax time comes, you’re cool and confident that you have just the information you need.
Just like in your personal life, you’ll need to be deliberate in the way you budget for your charitable spending, choose a charity, and record your donation for later use if you plan to deduct those donations when you file your taxes. Unlike your personal spending, GoFundMe campaigns and other good causes can cause real issues in your business finances.
Here’s how to avoid the tricks of charitable spending for your small business and maximize the treats.
Do your contributions count?
There are millions of good causes to put your money towards, but not all of them “count” when it comes to your accounting. In the United States, only donations made to a charity with a 501(c)3 nonprofit status can be deducted on your federal taxes. (Regulations will vary with your country if you’re outside the U.S.)
Before you donate, ensure that the charity is a 501(c)3 by checking their website or asking directly. You can also check the charity’s status on the IRS’ exempt organization database. The U.S. government also recommends checking with your state’s attorney general and the Better Business Bureau for complaints about charities.
If you want to donate to a cause without that nonprofit status, like the GoFundMe campaigns we mentioned above, you’ll want to pay yourself and then fund that request with your personal money.
Pro tip: Charity scams often choose names that are close to those of well-established charities, hoping you won’t check too closely. Be sure the name matches exactly.
Once you’re sure that your desired recipient is a reputable charity, you’ll need to make sure that what you’re planning to donate can be deducted. Here are some types of donations that are allowed:
- Money (use a check or credit card for a proper record of the transaction)
- Goods and personal property such as clothing or household items
- Vehicles like cars, trucks or boats
- Art and jewelry
- Stocks and real estate
- Patents
If you’re not sure of the value of your non-cash donation, you’ll need to get it appraised by an expert for your records.
If you’re tempted to provide services as a donation (say, photographing an event or writing a blog post), don’t: The IRS doesn’t allow tax deductions for donating services. However, you might be able to deduct expenses related to the donation (e.g., travel). Consult an expert to be sure in your particular case.
You may also not record and deduct a donation if you received anything — goods or services — in exchange for your gift.
And finally, donations must be made and recorded in the same calendar year for which you’re filing taxes.
What information should you be recording to deduct charitable donations?
Hang on to that stack of receipts, because each charitable donation your small business makes must have the proper documentation. That means being methodical and setting up a process you use each time you donate. Be sure to get a paper receipt or acknowledgement letter for each donation that includes:
- The date of the gift
- The amount of the gift
- The type of gift (e.g., money, art, yacht, diamond tiara)
- Confirmation that no goods or services were received in exchange
How should you record a donation in your books?
This excellent article by Cynthia Gaffney at Chron.com outlines how to record each donation as you make it. We recommend incorporating a calendar reminder or recurring to-do list task into your schedule to remind you to record donations before the details slip out of your memory.
- Set up a dedicated expense account for tax-deductible donations.
- Set up the charity as a new vendor for your company.
- Create an invoice to the charity for the donation, then issue a credit memo to zero out the invoice. Be sure to include what was donated and its market value. (If your hair just stood on end, don’t be scared — I can show you how to do this in your software.)
If you are using profit-first accounting, this would be a percentage of your Operating Expenses — and if you regularly donate like Moxie does through onepercentfortheplanet.org, you might want a separate bank account for your charitable donations.
What should you do at tax time?
If you’ve properly accounted for your donations throughout the year, filing your federal small business taxes will be much less scary.
If you are a sole proprietor, a partner in a partnership, or a shareholder in an S-corporation, the following two paragraphs apply to you. Other types of corporations can deduct charitable contributions on their income tax returns.
To claim a cash and/or vehicle dedication on your federal taxes for your small business’ charitable donations, you must file a Schedule A along with your tax form. If you have non-cash donations to deduct, like that yacht or tiara, you’ll also need to fill out a Form 8283. (Or give your tax preparer a heads up that you’ll be providing the information for them to take care of the forms.)
Be sure to carefully follow the directions the federal government provides for each type of form. You may not need to send in your documentation of the donation with your tax form, but either way, keep copies of all documentation with your records.
Here’s more information on deducting charitable deductions for different types of business structures.
Got a scary situation on your hands?
I’m not afraid of tricky accounting. Schedule a complimentary call with me and we’ll discuss how to turn those tricks into treats.