Small Business Charity Donations And Tax: What You Need To Know

Finance & Money Articles

According to the US Small Business Administration, around 75 percent of American small business owners make charitable donations each year. There are lots of ways to help charitable organizations, but it's important to understand the tax implications of giving away your profits. Learn more about the benefits of donating to charity, and find out how these donations can affect your annual tax return.

Why donate money to charity

Small business owners must carefully keep track of every cent that passes through their accounts, so it may seem odd to give away some of your precious profits every year. However, corporate social responsibility is increasingly important to American consumers, and many business owners now understand that a donation can bring plenty of benefits.

Good public relations, positive feedback on social media and an improved consumer reputation can all help your business attract new customers and retain existing clients. Charitable donations can also improve employee engagement and morale. Together, these benefits can all drive increased turnover, which should ultimately translate into more income.

What's more, eligible charitable donations are tax-exempt. As such, when planned and managed correctly, a charitable donation could ultimately give you a better return on investment than a new marketing campaign.

Choosing the right charity

Understandably, to help manage tax fraud, the IRS will only allow your small business to donate money to certain eligible charities. Aside from choosing a cause that supports your business's aims and strategy, you must also make sure the charity meets the IRS's criteria. Fortunately, there are plenty of organizations to choose from, and you can see the full list on the IRS's website.

For example, you can donate to a community chest, corporation, trust or fund that falls under the laws of the United States and is set up exclusively for charitable, religious, scientific or literary purposes, or for the prevention of cruelty to children or animals. For a small business, this gives you enormous scope.

Here's an example of how this could work. A veterinary practice could set up a partnership with a local animal cruelty charity to donate money and promote awareness of the issue. The charity will also then promote your practice, which, in turn, could lead to increased business and turnover. In this way, you can see how a charitable partnership could be highly beneficial to you.

Making donations

You must make all charitable contributions before the end of the tax year. You can also generally only donate up to 50 percent of your adjusted gross income in the relevant tax year. This limit applies to the adjusted gross income before you make any calculations for net operating loss carrybacks, so you may face years when the amount available to donate is low. Make sure you carefully manage your donations to avoid over-contributing.

You can only donate up to 30 percent of your adjusted gross income for some charitable organizations, such as veterans' organizations or cemetery organizations. Check with the IRS or your accountant before you donate. The IRS's online EO Select Check tool helps you search for organizations that are tax exempt.

Accounting methods

Cash accounting means that you record revenue when you receive the money and expenses when you pay them. The accrual method records revenue when you earn it and expenses when you incur them. You can donate to charity irrespective of whether you use the cash or accrual methods, but your contributions must still fall within the right tax year. Make sure you prepare your business tax return carefully, or you may exceed or under-utilize your limits.

Charitable donations can boost your small business's profits, but it's important to make sure you support the right organizations and account for your contributions accurately. Talk to a small business tax expert for more information or advice.

9 August 2016