Charitable Donations of Money or Goods

Americans have used charitable donations to lower their taxable income since World War I when the federal government introduced the charitable tax deduction.

Not all nonprofit organizations qualify as beneficiaries for tax-lowering gifts, nor do all gifts to eligible charities qualify. Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction offers.

Charitable Donations of money or goods:

Businesses in general are not allowed to deduct charitable contributions; however, payments to a charitable organization may be deducted as an expense to the business.

For example: If the business received ad space or marketing for the payment, it may be deducted as an advertising business expense.   Another example: The business paid $20 to a church for an ad in a program for a concert it is sponsoring. The payment is not a charitable contribution but rather a business advertising expense.  A third example:  The business made a $100,000 donation to a committee organized by the Chamber of Commerce to bring a convention to your city, intended to increase business activity.  The payment is not a charitable contribution but rather a business expense.

If an S-corp makes a charitable contribution, the contribution is not deductible on the S-corp tax return but is instead taken as a deduction by the corporation’s shareholder(s).

For example, you are the sole shareholder of his S-corporation. The corporation’s gross income was $100,000 with deductible expenses totaling $60,000. The corporation also mad $1,000 contribution to a 501(c)(3) charity during the year. That $1,000 contribution is not included in the $60,000 of expenses. Instead, it’s shown on the K-1 you receive from the corporation.  On your personal return, you will claim $40,000 of pass-through income from the corporation ($100,000 income minus $60,000 of expenses). The $1,000 of charitable contributions will be taken as an itemized deduction on your personal return if you itemize.

Why is it like this?

Charitable contributions in an S-corp don’t reduce a shareholder’s AGI; instead the contributions are taken as an itemized deduction. If the shareholder takes the standard deduction instead of itemizing, they receive no tax benefit at all from the charitable contribution.

Posted in Deductions