During the season of giving thanks and giving gifts, charitable giving can make a big difference to those in need and also shine a favorable light on your small business. But what’s the best approach and how do you claim that all-important tax deduction? Here are some tips for developing a charitable giving strategy and claiming the right deduction.
Giving Back is Good for Small Business
Research shows that giving back is not only important to small business, but also important to your customers. According to a 2010 philanthropic studyby Cone Communications, 85 percent of consumers have a more positive image of a product or company when it supports a cause they care about. Ninety percent want companies to tell them how they’re supporting causes. So more than 278 million people in the U.S. want to know what a company is doing to benefit a cause.
Charitable giving is also great for employee morale because it brings employees together to support good causes that are separate from their everyday work-life. From a marketing perspective, it can also give your business an opportunity to reach out and connect with members of your community on a different platform.
Of course, there’s also the tax deduction – more on that at the end of this post.
Making it Happen
Despite the benefits, charity isn’t always easy for small businesses. Finding the time and resources for meaningful activities can be challenging. And how do you determine which charity is the right fit for your business and your community?
As with all aspects of managing your business, it’s important to have a plan that is clearly tied to your goals. Connect your business purpose to a particular charity. For example, if you are in the restaurant trade, support a charity that collects food for the homeless or organizes military care packages for our troops. Lawyers could support charities or non-profits that work to provide low-cost legal support for low-income individuals.
If you can’t find an appropriate charity, simply pick one you’re passionate about and that will resonate with your employees.
Claiming Your Tax Deduction
Most charities or non-profits operate as tax-exempt 501(c)(3) organizations and donations made to them are tax deductible. Donations that are eligible for a tax deduction include cash, volunteered services, sponsorship of local charity events or the donation of inventory or services.
Be sure to check the tax status of the charity of your choice either directly with them or from the IRS for a quick look-up of tax-exempt organizations.
So what tax benefits can charitable giving provide?
Charitable contributions can qualify as tax deductions against your business’ annual tax liability. Generally, you can deduct up to 50 percent of your adjusted gross income. However, the IRS tax code is complex and it’s important to note that not all contributions can be deducted.
- Cash contributions – You can claim a deduction for cash or other monetary contributions as long as they aren’t set aside for use by a specific person. Make sure you make the contribution within the current tax year to be eligible for the deduction, regardless of the accounting method your business uses. Use Form 1040, Schedule A, to itemize deductions on your return.
- Property or inventory donations – These are tax deductible, although you’ll need to assess their fair market value. Use Form 8283 for donations over $500.
- Volunteering – This is a popular form of giving, and while you can’t deduct the value of your service, you can deduct some of the expenses you incur such as the cost of buying a uniform or even the costs of hosting a fundraising party.
- Benefits you receive as a result of your giving – If you get something in return for your donation you can only deduct the amount of your contribution that is over the value of the benefit/prize you receive. Suppose your company got involved in a charity auction and you placed a winning bid. If you bid $500 and the fair market value of the prize was $200, you can deduct the difference of $300.
It’s always a good idea to consult your accountant or tax advisor for information about what constitutes a charitable tax deduction and how to properly file your claim.