Our small business clients are generous people, contributing thousands of dollars this year to charities, churches and other organizations. While the charitable deduction in the tax code encourages people of financial means to help their fellow citizens - most simply do it for the goodwill of helping others. But, our SMB (Small and Midsize Business) clients can save even more money on their taxes by turning their charitable contributions into a business expense.
What qualifies for the charitable contribution tax deduction?
First, a charitable contribution is when you donate money (including securities or business ownership interests), property or services to a qualified organization and deduct the market value of the contribution on your personal tax return. Qualified organization include churches, employee beneficiary associations, social and recreational clubs, veteran organizations and financial cooperatives, among others. The IRS maintains a detailed list of every type of eligible organization on their website. You can check a charity's tax exempt status at http://www.irs.gov/app/pub-78/
When is a charitable contribution a deductible business expense?
The IRS says that you can deduct a payment to a charity as a business expense when the payment to the charity bears direct relationship to your business and you make the payment with the reasonable expectation of financial return to commensurate the amount paid.
For example, Fisher CPA Firm decides to advertise that 10% of the sales to new customers in the month of December will be donated to Toys For Tot's. We run an email and print advertising campaign heading into December highlighting the virtues of doing business with Fisher CPA Firm because we support Toys for Tots and other charities in our community. Since we ran the campaign with the reasonable expectation that we will earn more money than the cost of the ad, we can deduct the 10% donation as advertising expense.
Another example, Fisher CPA Firm is asked to sponsor a small business conference put on by the local chamber of commerce (a 501c3 charity). We agree and pay a sponsorship fee because we believe the exposure from our
position as a supporter of small business will land us new clients that will earn us more than the cost of the sponsorship fee.
Why would I want to turn my charitable contribution into a business expense?
Business expense are not subject to limitations. Charitable contributions are subject to limitations and can be eliminated (called a "phase out") as a deduction if you earn more than $300,000 as a married tax payer. Whenever you have the choice between a business or personal deduction - always go for the business deduction.
If you have any questions about the deductibility of business expenses versus charitable expenses, please call us. A short phone call could save you a big headache later.
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