Subscribe to our newsletter for monthly tax tips:


Schedule a Free Consultation Learn About Our Services

Navigating The Landscape of Charitable Giving

From religious leaders to civil icons, society heads to intellectual heroes, the best and brightest members of society have always agreed on one thing: the vital role of charity and charitable giving in our human world.

It is so important, in fact, that nearly every country in the world incentivizes charity in some way, shape, or form. The problem is that many citizens in America and beyond find these same ways, shapes, and forms to be murky and more than a little complicated. Fear not! We’re here to give you a brief, straightforward guide to navigating the charity landscape - both for your benefit and humanity’s.

Note: This piece is focused specifically on the laws, incentives, and resources useful to those residing in the United States of America.

The Role Of The Individual Giver - Solo Incentives For The Savvy Supporter.

One can hardly calculate the number of causes that individuals in the USA and beyond hold dear. Whether it’s the support of global initiatives such as the World Food Bank or local community causes such as funding your town’s volunteer fire department, the array of good you can potentially do is vast.

To make charitable contributions even more attractive to individuals, the IRS and associated government agencies have provided a variety of incentives that reward the American taxpayer for their generosity. The main incentive is, of course, the availability of tax deductions for charitable giving.

Most of us are at least somewhat familiar with these deductions, but it’s worth noting that plenty of people are uncertain about what, to whom, and when donations count as “charitable.” According to the official IRS website, the basic categories are (paraphrased) as follows:

  • Donations to a state, district, or territory of the USA specifically for use in public works and/or social projects.
  • A contribution to an organization, fund, chest, or foundation whose express purpose is “charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.”
  • Assets given to a religious organization (such as a synagogue, mosque, church, temple, dojo, etc.) registered as tax exempt.
  • Donations toward a veterans’ relief organization or associated project.
  • Contributions to a nonprofit fire service/volunteer emergency services department.
  • Gifts given to a civil defense organization (an organization dedicated to the protection, rescue, and rehabilitation of citizens impacted by manmade or natural disasters and/or military conflict).
  • Donations to a fraternal society (such as the Freemasons or Odd Fellows) that are specifically to be used for a charitable cause or purpose.
  • Charity given to and for the care of a nonprofit cemetery/memorial organization, which is not delegated to a specific lot or memorial but for the overall care of the cemetery. 

Organizations whose donations are counted as tax-deductible will create a receipt or other proof of donation, as they are required to do so by law. If they do not offer a copy of this receipt automatically, you should ask for one and keep it with your other tax documents so that you can record the donation information under your itemized deductions. 

The IRS website provides a simple and easy-to-use search tool for finding tax exempt organizations whose donations can be deducted from your tax burden. Any organization with a 501(c)3 status will be included under this category.

When it comes to deducting charitable donations, you can deduct up to sixty percent of your adjusted gross annual income (total income minus certain exemptions and deductions as specified in code 62 of Title 26 in the U.S. tax code) as of 2019. Sometimes you will be limited to less than this, but that will depend on your circumstances and can be discussed with your accountant. You should also discuss the possibility of carrying forward unused deductions, which often qualify for up to five years after the contribution is made.

New laws, such as the Tax Cuts and Jobs Act, have changed the nature of charitable deductions and in many cases have disadvantaged nonprofits which depend on donations from U.S. taxpayers. To avoid these disadvantages, strategies such as bunching your contributions, using a financial services firm or community foundation to create your own charitable fund, or focusing your donations on a single charitable cause instead of making many smaller contributions throughout the fiscal year.

The bottom line is that utilizing charitable incentives well goes hand in hand with having a plan, keeping good records, and taking the time to review and consider how, why, and when you make donations as an individual taxpayer. While the information provided here can help you with all of these things, it’s important that you speak to a qualified accountant or tax professional to make sure you are doing everything correctly and with the maximum benefit in mind.

The Role Of The Business Donation - Charitable Incentives For The Philanthropic Business Owner.

The first point that ought to be noted when discussing charitable donations as a business owner is the fact that single-member LLCs, sole proprietors, or S-Corp shareholders would deduct qualifying charitable contributions from their business on their individual income tax forms. This is especially relevant to freelancers or those who outsource most of their work rather than hiring full-time employees, and to those who are part of a partnership (the latter of whom will receive a Schedule K-1 form detailing the business’s income and expenses). 

This can work out in a variety of ways depending on your individual situation. For example, members of a partnership would divide a charitable gift deduction by listing an equal percentage of the donation in their individual income tax forms (after calculating their individual adjusted gross income from the partnership).

Another example is that of a sole proprietor whose business makes a contribution to a qualified nonprofit. Since there is no legal distinction between the sole proprietor and the business entity itself, this contribution would be deducted on the SP’s 1040 income tax form - so, much the same as for an individual who is a member of a partnership. In both cases the business shareholder(s) would use their K-1 form to file their personal income taxes, and the deduction would be calculated using this initial information.

If, however, a business is registered as a C-Corporation, it is legally distinct from the shareholders and will be regarded as its own entity. This means that charitable contributions, whether in the form of cash, assets, material goods, or fundraising expenses, will be written off as a business expense rather than an individual income tax deduction.

A C-Corp business can generally deduct up to 10% of net income from charitable contributions, and the CARES Act increased this amount to 25% in March 2020. The rules which dictate qualifying contributions often differ from those of an individual or S-Corp/LLC donation. For example, a C-Corporation cannot write off pro bono services as a donation. 

A good rule of thumb is that qualifying write-offs for C-Corp businesses must involve the exchange of assets, be they the exchange of money for a product used by the charity, inventory with a measurable value donated to a nonprofit, or events paid for and hosted by a corporation on behalf of a charitable organization. So, time cannot be assigned monetary value and deducted as a charitable business expense, but any expenses accrued while assisting in a qualifying charitable cause can be written off.

Donations made to individuals are not considered deductible. Another word of caution: there are specific guidelines and laws dictating how non-cash donations (such as in-kind or inventory contributions) are to be valued and deducted. Make sure you refer to Publication 526 and speak with a qualified accountant before attempting to evaluate any of these contributions for tax write-off purposes.

To sum it all up, here’s what business owners and shareholders should keep in mind when navigating the charity landscape:

  • A business registered as an LLC, sole proprietorship, or partnership is a “pass-through” entity - this means that all expenses and income are passed directly to the shareholder(s) and any charitable contributions will follow the same path and be deducted on the shareholders’ individual income tax forms.
  • A C-Corporation is a legally distinct entity with specific qualifications, and charitable contributions will not be listed as “deductions” on an income tax return, but instead will be “written off” as business expenses on the corporation’s 1120 income tax return.
  • Businesses can make donations in the form of cash contributions, but they may also make non-cash donations through the giving of assets like inventory, advertising, fundraising events (specifically the expenses relating to this like catering, space rental, or stationery).
  • There are strict rules about how a non-cash asset is to be valued when given as a charitable donation, and failing to follow these guidelines can result in severe penalties for the guilty party.

As always, this information should only be used in conjunction with the advice and insight of a qualified accounting professional. We do not advise that you undertake any major tax decisions without consulting such a professional, as the IRS guidelines and relevant laws change frequently and can differ depending on current circumstances, such as the Coronavirus pandemic. 

In Conclusion - It Pays To Give, And You Don’t Have To Navigate The Charitable Landscape Alone.

All of this information might seem intimidating, but it’s really quite simple when you break down your unique situation and needs. There are plenty of governmental and privately-run resources available for you to utilize when making a plan for your charitable contributions each year, and the best plan is the one you lay out well in advance of tax season.

Whether you are an individual engaging in a personal cause, a personal shareholder in a small S-Corp or LLC business, or someone responsible for the tax returns of a C-Corporation, you have a variety of options for getting the most out of your donations. The key is to be informed, seek out professional advice, and always double and triple check your returns to make sure they are up to snuff regarding current IRS regulations.

It’s always prudent and, in many cases, virtually necessary to engage the services of a qualified accounting firm like Foumberg, Juneja, Rocher & Co. when organizing your taxes and all associated deductions or write-offs. Investing in just a few hours of expertise can save you from untold stress and a variety of common (and costly) tax return mistakes. If you have any questions, feel free to reach out! Until next time, stay safe, stay well, and stay prosperous.

Tarun Juneja, Firm Principal, Foumberg, Juneja, Rocher & Co. 

Emily Montague | 11/03/2020