Reprinted with Permission Tulsa World
During this season of giving, charitable contributions can make a significant difference to those in need. While charitable giving is to be applauded and encouraged, a business owner should take care to understand how to properly report those philanthropic gifts.
Although any business may make a charitable contribution, how the contribution is deducted for income tax purposes depends on the organization's structure. Charitable contributions made by a business are usually not deductible by the business itself, unless the business is a corporation. If your business is a sole proprietorship or a single-member limited liability company, your business taxes are filed on Schedule C of your personal tax return. Because the only method of deducting a contribution is on Schedule A of your personal tax return your business cannot make a separate charitable contribution. It's important to note that charitable contributions reported on Schedule A require itemizing your deductions. Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply depending on the type of contribution and the type of charitable organization.
Because partnerships and S Corporations are also not separate taxpayers for income tax purposes, their income and deductions flow through to their partners and shareholders on schedule K-1s. So, if your partnership makes a charitable contribution, each partner takes a percentage share of the deduction on his/her personal tax return through their Schedule A. Deductions for charitable contributions by members of a multiple-member limited liability company are treated in the same manner as partnerships and S Corporations. However, if you own a regular C corporation, the corporation is entitled to the charitable deduction, subject to specific percentage limitations. Sometimes, business owners confuse advertising expenses with charitable contributions of cash. IRS regulations provide that you can deduct a payment to a charity as a business expense when the payment to the charity bears a direct relationship to your business and you make the payment with the reasonable expectation of financial return commensurate the amount paid.
For example, a business owner can pay a charity for an ad on the charity's website or in pamphlets and deduct as a normal business expense because the business received something in return for the donation. However, if you have a charitable contribution and a business deduction within the same transaction, no part of the payment can be deducted as a business expense. Business expenses are preferred from an income tax perspective because business expenses are 100 percent deductible and are not subject to limitations. To the extent possible, consider converting charitable contributions into a business expense to lower your income taxes.