You have your bookkeeping down to a science when it comes to accounting for your regular business activities. How about accounting for business charitable donations?
If your business makes charitable donations, you should know how to record the donation and whether or not you are able to deduct the gift. Here are a few things to keep in mind as you consider donating to charity.
What is charitable giving?
The IRS states a charitable donation is a gift made to a qualified charitable organization. Qualified charitable organizations are discussed in the next section. A charitable donation is defined as a gift made without any expectation of getting anything of equal value in return.
Whom can you give to?
As mentioned above, a charitable donation is given to a qualified organization.
Qualified charity organizations are often 501(c)(3) status organizations, like Giving Center. Some other types of qualified organizations include war veterans’ organizations, volunteer fire companies, churches, museums, and nonprofit hospitals. Check out Publication 526 for more types of qualified organizations.
The IRS also has a convenient search tool to help you find eligible organizations.
What can you give?
One easy way to donate is to simply write a check and mail it to your favorite cause. Or, you can get creative with your charitable donations. Some gifts may qualify as a tax deductions toward your business’s annual tax liability
Money
When you donate money to charity it lets them use it as they see fit. An organization may stretch your dollars by purchasing needed items at a deep discount. For example, food banks often will state how many meals they can provide for five dollars. Cash gifts are also a really good option when you do not have the right goods or services to give an organization.
Cash and other monetary deductions are deductible as long as they aren’t set aside for a specific person. For example, you may deduct a monetary gift given to an organization that provides clothing to people in need. But, you can’t deduct money given to a specific person to buy clothing.
Property
There are many things can be donated for use by a nonprofit. And, you may donate items a nonprofit can sell to earn more money. Some examples of items your business can donate are: computers and electronics, real estate properties, vehicles, intellectual properties, business aircraft and even boats.
Remember, for a tax benefit you may only deduct the fair market value of the items you graciously donate to charity. To help determine the fair market value of an item, check out Publication 561.
Time
You can also donate your time and services through volunteering. When doing this, you may not deduct the value of your service. For example, lets say you own a landscaping business and you donate landscaping services to a charity, you cannot deduct the amount you would normally charge for your services.
You might be able to deduct certain expenses related to donating time. For example, you might be able to deduct supplies that you give out.
Bookkeeping tips for small business charitable donations
Businesses that make charitable donations need to keep detailed records. You need to record whom you donated to, what you donated, the value of what you donated, and when you donated.
Keep these records handy for when you are ready to file your business taxes. You should keep these documents around for several years, just in case you have an IRS audit in the future.
When you make charitable contributions, you are spending money or moving inventory. Record your donations in your accounting books.
How you report and deduct your charitable contributions depends on your business structure.
If you are a sole proprietor, you may list the donation as an itemized deduction on your Schedule A of Form 1040.
If your business happens to be an S Corp or a partnership, you will record the donation on Schedule K-1.
And, if you own a corporation, you will report the donation and deduction on Form 1120.
