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Understanding How Donations & Charitable Giving Reduce Business Taxes

By: Andrew Deen

 

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Charitable donations can have life-saving results for people all over the planet. They can also give you a break on your business taxes—sometimes a big one if you know how to file them properly. Business taxes are always difficult, but only more so as the nation heads towards a recession.

Small business owners everywhere can benefit from steps that reduce their outgoing revenue. Charitable donations can provide the best of both worlds, allowing you to make a positive impact while improving your business prospects at the same time.

Making Sense of Tax Deductions

Businesses can write off up to 25% of their taxable income through donations. Any number that exceeds 25% is postponed to the next tax period.

Most businesses time their donations to make sure that they line up with the current tax period. Additionally, you must:

  • Make sure that the charity is qualified. The IRS only allows deductions from charitable donations that went to 501c certified organizations. Make sure the organization you wish to support is appropriately accredited.
  • Save your receipts. In the event of an audit, receipts of your charitable donations will be required. Most charities provide digital receipts that can be easily stored and accessed. It’s recommended that businesses save their receipts for three years.
  • Consider other forms of deductions. Charitable donations don’t always take the form of cash. For example, if you are contributing to a local food pantry, the total value of your donations can also be deducted from your taxes. Once again, saving receipts is key. You can even deduct wear and tear on your vehicle, provided that you make detailed notes about your mileage.

How to Donate to Non-Profits

Non-profits are at the heart of many social movements. Not only do they provide life-changing support to people all across the planet—non-profits are largely responsible for the enormous drop in extreme poverty that the world has experienced in the last several decades—they are also major employers.

In some communities, non-profits account for up to 12% of the workforce. Supporting non-profits allows you to have a positive impact on the world. It can also help with your business’s public image, and reduce the taxes that you owe.

Donating to non-profits is usually very easy. How you do it may depend on your goals. When deciding how to donate to non-profits you can set up:

  • Recurring Donations: If the idea is simply to donate a specific amount of money each year, you can accomplish this easily by setting up recurring donations. Most charities allow you to set up automated payments similar to how you handle any other bill online. The money is deducted from your account each month without you ever needing to think about it, and you are provided a clear stream of digital receipts that you can use later for tax purposes.
  • Event-Based Donations: Alternatively, you may wish to make event-based, one-time donations. For example, you might feature an event where ten percent of revenue goes to Project Healthy Children—a high-impact charity that provides nutrition to children living in areas without regular access to food.

Non-profits depend on donations and usually make it as easy as possible for interested parties to make their contributions. Find a giving strategy that works for you.

Tax Planning Strategies

It’s important to sew your donations into your overall tax planning strategy. Tax planning strategies are there to help you avoid penalties and also just to guarantee that your deductions have the highest possible right off.

Talk to your accountant about how, when, and where to donate to see that your charitable giving has the biggest impact on your business taxes.

It’s Smart to Do The Right Thing

Naturally, charitable giving shouldn’t be about figuring out how you will benefit. Most people are taught that as children, and it remains true even as you run a business. Charitable giving as a tax write-off is not just about the bottom line.

If there is a cause that you care about, supporting it allows you to make a difference in the world while improving your financials and potentially even improving your brand image. It’s the right thing to do. It’s also the smart thing to do.

Published: May 25, 2022
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Andrew Deen

Andrew Deen has been a consultant for startups in almost every industry from retail to medical devices and everything in between. He implements lean methodology and is currently writing a book about scaling up business. Twitter @AndrewDeen14.

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