Charitable Contributions: Don’t Just Do It For The Tax Deduction!
At Empowered Profit, we are so honored to support some amazing businesses that are making a difference in the lives of their clients and in the world. One of the ways those businesses want to make a bigger impact is by making financial contributions to organizations they want to support. We are often asked about the tax implications of these charitable contributions and how to properly make them.
As with everything we share, any and all tax advice needs to be tailored for your individual situation, so please read this and then discuss it with your own tax advisor and financial team. This is not tax or legal advice.
Before we jump into the tax side of things, think about why you want to make your charitable contributions and where you want to make those contributions. The impact that your donation can have is much more important than any tax deduction you may or may not receive from making that donation.
If you are a Fact Finder, you can do some research on organizations you are considering by using sites like Charity Navigator, Guidestar, and Give.org. You can research things like their leadership teams, the structure of their organization, and the impact they have made in the past. You can also look in your local area and donate directly to places like your local food bank, local schools, shelters, etc. Those local groups may not be listed on the larger websites, but they can have an even bigger impact on your local community.
We often hear from clients that they would like to give more but they forget or wish they had a system where it was easier to give. Here are some ways that our team makes it easier:
- Look into an auto donate option, where you can give a set amount each month to the organizations you want to support.
- Every time you go to the grocery store or Target, grab an extra bag of food, personal products, or diapers and drop them off at your local food bank.
- Pick a few organizations to follow and make sure you are on their email list so that you can see when they are running specific campaigns where they may get a match or some other larger impact from your contribution.
- Go ‘offseason’. During the holidays (most years) many organizations are overloaded with offers to help and often can’t accommodate all of the volunteers they have. But, they have a need in the summer as well, and you can make just as much of a difference then too. So instead of piling one more thing onto your list during the holidays, schedule your volunteer time & dollars for the other months.
In many scenarios, you may not receive a tax deduction for making any of your charitable contributions. So don’t do it for the tax deduction.
Come with me into a quick tax class so I can show you why this is the case…
You get to choose each year on your tax returns whether you will take the standard deduction or itemize, and you usually choose which number is larger. It used to be pretty easy to get your number above the threshold and itemize, but because the latest tax law updates increased the standard deduction, that’s often not the case now. (This not necessarily a bad thing, because it actually reduced the taxes you will pay, but it changes being able to ‘write off’ certain things.)
For 2020, here are the standard deduction amounts:
Single/Married Filing Separately $12,400
Married Filing Jointly $24,800
Head of Household $18,650
So, what this means, is that if you are single, you will need to have itemized deductions of more than $12,400, or you will just take the standard deduction.
The other things that can be included in your itemized deductions are things like mortgage interest + real estate taxes, charitable contributions, state income taxes paid, and some medical expenses, all of those with their own limitations.
If you are single and don’t own a home, in many cases it would work much better for you to take the standard deduction. And then, there’s no tax deduction given for any charitable contributions you make.
Can you make the contributions through your business?
Sort of. (I know, an accountant’s favorite response to questions. lol)
Any charitable contributions you make through your business flow through to your personal return and then are deducted (or not deducted) there based on the above information.
However, if you can show that the contributions that you made have a business purpose, then you may be able to make the case that they can be deducted by your business.
There is various guidance that has been released by the IRS that says that:
A charitable payment that bears a direct relationship to the taxpayer’s business and is made with a “reasonable expectation of financial return commensurate with” the amount of the transfer, is not a charitable contribution. Instead, the payment may be deducted as an ordinary business expense.
The important thing in that phrase is that it turns the payment from a charitable contribution (possibly not tax-deductible) into a tax-deductible business deduction, like for advertising, or program costs.
Let’s say you have an organization that you want to support with your business, and you advertise that you donate an amount of all of your sales, or sales of a particular product or launch to that organization. Clients tell you that they decide to work with you because of that purpose, which could become a business advertising expense instead of a charitable contribution. You will want to be sure you keep documentation of the advertising you do about it, the response from clients, and the donation confirmation in case that information is requested by the IRS later.
The way that these expenses are handled will depend on factors in your business and you will want to speak with your financial team about how this would apply to your own business, but you can be creative about it. There are ways to support the organizations you care about and also receive a tax deduction for them.
Don’t do it for the deduction – but it’s a nice bonus to be able to write it off on your taxes and may be able to do it with a little planning & some good recordkeeping.