Guide to Charitable Donations for Small Business Owners
By Trent Derrick, CMT®
Nearly 75% of small business owners donate to some form of charity, and small businesses as a whole donate 250% more than large companies to local organizations. (1) This makes charitable giving one of the most common ways to obtain tax benefits for a small business. Considering you can contribute to a cause that you care about, support your local community, and provide benefits to your small business all at the same time, who wouldn’t want to donate to charity? If you’re a small business owner considering charitable donations, this guide can help you find the best way to donate to maximize your contribution and minimize your taxes.
Why to Donate
As mentioned, giving to charity is a great way to support important causes and organizations while saving taxes at the same time. But there are many other benefits that you may not initially consider. For instance, donations can help to communicate your values as a small business. Do you donate to a specific church or religious institution? Or maybe you prefer to donate to schools, hospitals, or animal shelters. Whatever you choose, you can use the donation as a way to connect with and support your local community, who may in turn support you with their business. This can be especially true if you choose a cause that you know will resonate with your clientele.
How to Donate
There are many ways to give as a small business owner. Depending on the structure of your business, consider the following types of donation strategies:
- Cash contributions: You can donate money and assets directly to the organization of your choosing. Be sure to obtain written acknowledgement from the charity for contributions greater than $250. Canceled checks or receipts should be kept for all cash donations, and non-cash contributions above $5,000 will require an appraisal.
- Qualified IRA plan distributions: If you are over 70½, you can donate money directly from your IRA to a qualified charity without including the distribution in income. This is not taken as a charitable deduction, but as a reduction of income instead.
- Out-of-pocket expenses in giving services: You can’t deduct the value of your time or service, but you can deduct out-of-pocket expenses in performing such services. This includes things like uniforms, supplies, travel as a delegate, and mileage. Remember to save your receipts!
- Contributions from which you benefit: If you contribute in a way that also provides you with a benefit (like buying an item at a charitable auction), you can only deduct the amount of your contribution that is more than the amount of the benefit. For instance, if the item you bought is worth $20 and you paid $25, you can deduct $5.
Tax Benefits
Small businesses can deduct qualified cash contributions up to 25% of their taxable income. (2) This can result in a significant reduction in tax liability and a huge cost-savings!
Qualified
Money or property given to:
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state, or local governments solely for public purposes
- Nonprofit schools and hospitals
- Charitable nonprofit organizations like the Salvation Army, Red Cross, Goodwill, Scouts, etc. (Click here for a full list.)
- War veterans’ groups
- Hosting an exchange student
Not Qualified
Money or property given to:
- Civic leagues, social and sports clubs, labor unions, chambers of commerce
- Most foreign organizations
- Groups run for personal profit
- Groups whose purpose is to lobby
- Homeowners associations
- Individuals
- Cost of raffle, bingo, or lottery tickets
- Dues paid to country clubs, lodges, fraternal orders, etc.
- Tuition
- Value of your time, services, or blood donated to a blood bank
Where to Donate
Even with all the restrictions on which organizations are considered qualified, there are still a seemingly infinite number of worthy causes out there. If you’re looking for a qualified charity to support, visit http://www.justgiving.com. They list 1.5 million organizations by category, including a profile of each group’s purpose and a summary of their finances. They even detail the percentage of donations that went to the actual charitable cause versus administrative costs, so you’ll know exactly how your donation is being spent.
Get Started Today
If you’re a small business owner looking to contribute to important causes and save big on taxes, consider implementing a charitable gifting strategy. Together, we can determine the best approach for your business. Book a consultation with me here or email me at trent@legacywm.com.
About Trent
Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning, cash flow management, retirement planning, and bookkeeping. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT®) professional. Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.
________________