Most people already understand the tax rules for individual charitable donations, including generous deductions that may be available to itemizers when they give cash or property to charity. But your business may also reap tax rewards for helping out a qualified charitable organization. Though the rules for business entities are similar to those for individuals, there are a few twists and turns to consider.
Of course, the benefits aren’t strictly limited to taxes. In addition to helping a worthy cause, you may build valuable goodwill within your community that can trickle down to the bottom line. Keeping that in mind, here’s a brief overview of the main tax rules for charitable donations made by a business.
How to Qualify for Deductions
For starters, deductions can be claimed by various types of business entities — including corporations, partnerships and limited liability companies (LLCs) — but write-offs for pass-through entities are claimed by the individual owners on their personal tax returns. Accordingly, for these purposes, we’ll limit this discussion to charitable contributions made by C corporations.
As with individuals, donations must be made to qualified IRS-approved charitable organizations in order for them to be deductible. Your company can’t write off donations to not-for-profits that don’t meet the requirements even if your intentions are good. For example, if your business donates money directly to a family in your community that’s experienced a tragedy, it gets no deduction for your direct contribution.
Important: Your business must keep detailed records of charitable donations. Retain the records for at least three years in case the IRS challenges a write-off.
Limits on Deductions
Currently, individuals may deduct monetary contributions of up to 60% of adjusted gross income (AGI). The excess above the 60%-of-AGI limit may be carried over for up to five years.
C Corporations have an annual deduction limit, too. Prior to 2020, the limit was generally 10% of the corporation’s taxable income for the year, subject to a five-year carryover. However, legislation enacted in 2020, during the onset of the pandemic, upped the ante for monetary contributions to 25% of taxable income. This relief was subsequently extended through 2021.
Furthermore, the percentage limit is 100% for qualified disaster relief contributions made in cash during the period spanning January 1, 2018, through February 25, 2021. The 25% limit on qualified contributions made in cash for 2020 and 2021 is applied first without regard to any qualified disaster relief contribution. Excess contributions above the 25% limit could also be carried forward for up to five years.
Important: There’s some sentiment in Congress for extending the higher 25% limit again. This could be addressed in year-end legislation. However, under current law, the rule has reverted to 10% of taxable income for 2022 and thereafter.
At various times, Congress has authorized enhanced tax deductions for charitable contributions by corporations. But these breaks have generally been temporary. For example, legislation providing tax breaks for gifts of food inventory expired after 2021, although it’s possible this tax break could be revived.
However, one enhanced deduction is permanently on the books. Normally, deductions for property donated to charities are limited to the fair market value of the property less the amount that would constitute ordinary income if sold. However, a business entity (including a pass-through entity) that donates inventory can deduct an amount equal to the basis of property, plus one-half of its unrealized appreciation, up to twice the amount of basis.
To qualify for this tax break, the donation must be made for the care of infants, the ill or the needy. Be aware of the following three key definitions under the tax code:
1. Infant. This term refers to a minor child as determined by state law. Care of an infant involves parental functions addressing the physical, mental and emotional needs of an infant.
2. An ill person. This is someone who requires medical care. For this purpose, medical care is the alleviation or cure of an existing illness, including care of the physical, mental or emotional needs of the ill.
3. A needy person. This is someone who lacks the necessities of life due to suffering poverty or temporary distress. The care of the needy must be for the alleviation or satisfaction of an existing need or a temporary need for shelter and food arising from a natural disaster.
Should You Play the “Matching Game?”
There’s a way that C corporations can benefit charities without shouldering the entire load. If it suits your purposes, your company may set up a program where it agrees to “match” donations by employees, up to a specified annual limit or a percentage of contributions.
Everybody wins when companies play the matching game: Employees can deduct their contributions, the company can deduct its contributions and a deserving charity gets money to help achieve its mission.
For example, suppose your company establishes a one-to-one match with a $1,000 limit. If an employee contributes $500 to a qualified charity in 2022, the company would also contribute $500. If an employee donates $1,200 in 2022, your company’s donations would be limited to $1,000.
Employee donation matching programs generally provide a list of IRS-approved charities to which they’ll match employee donations. It’s important to choose reputable charities that are experienced in these endeavors and are likely to appeal to a wide range of employees.
Organizations that have a track record of participating in employer matching programs can provide paperwork to help launch your company’s program and handle your recordkeeping requirements going forward. Contact your tax advisor to discuss whether the matching game makes sense for your situation.
Give with Your Head and Your Heart
C corporations can maximize the tax benefits for making charitable contributions through astute planning. Remember that the law in this area is continuing to evolve. Contact your tax professional with any questions or to find out about any significant developments and how your tax situation could be affected.