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Grow Your Business Finances

Small Business Guide to Charitable Giving and Tax Deductions

image for Rawpixel.com/Shutterstock
Rawpixel.com/Shutterstock
  • Charitable contributions from businesses to nonprofits can qualify for tax deductions.
  • Donate to charity because you feel a connection to an organization, not because you want a tax deduction. There's more to charitable giving than receiving tax benefits.
  • When it comes to the paperwork and tax requirements for charitable contributions, it's often easiest to speak with a tax advisor.

As summer closes and the holiday season draws nearer, many businesses look for ways to give back to their communities, such as through charitable contributions.

Many businesses celebrate the holiday season or ring in the new year with a gift to charity. That gift can come in many forms, from volunteering at a soup kitchen to donating a few thousand dollars to a local charity. It's a simple act of kindness that benefits the community and helps brands build goodwill.

But for small businesses, donating to charity can also bring a handful of difficulties and potential headaches. If your business wants to give to charity at any time of the year, it's crucial to follow a few guidelines.

Let's start with the basics. There are a few reasons why your business should consider donating. Charitable giving is good PR, and it makes sense for business, especially for small businesses that depend on their communities to keep them afloat.

"What distinguishes small business from large-scale corporations is the connection with the community," said Kristen Fusaro-Pizzo, owner of Bath, Body, Candle Moments. "People want to … shop at a small business because a small business cares about them as individuals and the causes they care about."

Charitable giving demonstrates that you give back to the community and are in business for more than profit. As a small business, while you don't get as large a tax deduction as big corporations and enterprises do, don't overlook the other benefits of philanthropy.

"As a single-store retailer, it is important for us to give back to the community," said Brad Schweig, vice president of operations for Sunnyland Furniture. "There isn't really any tax benefit for us, so it comes back to being a part of our community. We do think it helps us from a marketing standpoint, as we want people to know that we are local, our team is local, and we support making our local community a better place."

Charitable giving is also a way to build alliances with other organizations and network with individuals who are potential partners. Donating to a local organization can be the start of a long-lasting relationship. [Read related article: 6 Ways to Get Involved in Your Local SMB Community]

"Develop an ongoing relationship with the charities you support," said Kris Putnam-Walkerly, president of Putnam Consulting Group, a philanthropic advisory firm. "Don't limit giving to the end of the year. Talk to the nonprofit about ways you could help year-round, such as volunteering, sponsoring events and inviting the charity's CEO to speak to your local business associations. And remember, this is a two-way relationship. Ask the charity if there are easy ways they could publicize your support, such as in their donor newsletters."

To make the most out of your donations, first of all, pick the right organization to donate to. For a small business that's tied to the community, it often makes sense to pick a local group.

"We try to focus on smaller local groups versus nationwide organizations, since these are the ones that the bigger companies seem to miss," Schweig said.

If there's a national charity that ties to your company's values, that's always an option as well. You want to find an organization that best fits with your business's values.

When seeking out an organization to donate to, take adequate time to select one. Making contributions to charities and organizations that truly mean a lot to your business is better than just doing it for the sake of making contributions. Put sufficient time, effort and energy into choosing the right organization for your business to support.

You may find two or three organizations that fit your business's values. If that's the case, don't shy away from providing charitable contributions to multiple organizations. Building a relationship with and supporting multiple charities is a good idea. It gets your business involved in your community while also building strong relationships with great charitable organizations.

There are tax benefits when your business donates to charity. For your donation to qualify for a tax deduction, your chosen charity needs to be a bona fide 501(c) (3) organization. Use the IRS's search tool to confirm the group is registered. You can search by state, which helps you quickly find your charity of choice to confirm whether you are eligible to receive a tax deduction.

It's important to note that the Tax Cuts and Job Act of 2017 made it harder to claim tax deductions for charitable giving. There are ways to get around this change, however, including the use of a donor-advised fund. A donor-advised fund allows you to donate enough money upfront in one year to become eligible for tax deductions while the donor-advised fund holds on to the money. You can then distribute the money from the fund over several years if you want to make more regular donations. 

Sound complicated? It can be if you're unfamiliar with the regulations. It's not a bad idea to speak with financial experts for advice on how to donate to charity in a way that makes sense for your business. It's easier to file your taxes at the end of the year when your tax advisor helps with your tax return. 

"As far as looking for advice somewhere, I honestly believe [small business owners] should be talking to their tax advisor," said Kathleen Adams, partner at Signature Estate & Investment Advisors LLC. "It's too complicated right now. People have a lot of misconceptions. They come to me all the time with things they've read on the internet. This isn't the year to do that."

Before speaking to a tax advisor, there a few basic things you can learn about charitable deductions. Businesses should know the three types of charitable gifts that can be deducted:

  • Cash
  • Gifts of property or equipment
  • Travel expenses accrued when helping a charitable organization

The 2019 IRS standard mileage rate is 14 cents, meaning you can expense 14 cents per mile when you travel to help a charitable organization. This might not be a lot of money when you help local organizations, but it's still worth tracking and deducting. Keep your gas receipts and track mileage to better estimate the money you've spent traveling for charitable giving. Cash contributions are straightforward and should be easy to track.

For gifts of property or equipment, the deduction depends on how much you donate. For example, if you donate clothing to a homeless shelter, you receive a deduction for fair market value, rather than the new value of those clothes. If you give cash or property to a charitable organization that exceeds a $250 value, you'll want the organization to recognize your gift in writing. This is necessary for tax purposes. A non-cash charitable deduction of $500 requires you to fill out this IRS form. Donations to nonprofits typically don't have to be reported on a 1099 form, though. The paperwork and different rules are two reasons why it's safest to speak with a tax professional as you aim to increase your charitable giving.

The IRS has some rules on how much money you can deduct. According to the IRS website, "In general, contributions to charitable organizations may be deducted up to 50% of adjusted gross income computed without regard to net operating loss carrybacks. Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30% adjusted gross income (computed without regard to net operating loss carrybacks), however."

The site goes on to say that the 50% rule applies to four different types of charitable organizations:

  • Public charities
  • Private operating foundations
  • Private foundations that distribute donations to private operating foundations and public charities within 2.5 months from when the contributions are received
  • Private foundations that pool contributions and eventually pay them to public charities

The 30% rule applies to private foundations that don't fall under the 50% rule. Again, the details of charitable tax deductions can get a little tricky. It's helpful to know your business's net gross income and to speak with a tax professional. It's better to talk to a qualified tax advisor than make mistakes on your tax forms and deduct contributions that shouldn't be deducted.

As for cash contributions, the Tax Cuts and Jobs Act raised the maximum donation to 60% of your adjusted gross income.

Be sure to keep track of your donations through written records. Include when you've donated and how much money. Having records to look back at makes tax season easier, and it helps ensure you won't be subject to an audit or have legal repercussions.

Note that certain charitable donations are not tax deductible. These are just a few of them:

  • Political donations
  • Gifts to individuals
  • Gifts to for-profit schools

If you want a charity tax deduction, make sure you're donating to a charity approved by the IRS. Obviously, you won't receive a charity tax deduction if you aren't donating to an approved charity.

According to a study conducted by American Express and The Chronicle of Philanthropy, small companies donate an average of 6% of their profits to charity. The tax benefit you receive will be based on how much you give and your business's revenue. You can find the detailed tax benefit rules in the IRS tax code. Again, the Tax Cuts and Jobs Act made some of these tax laws somewhat more complicated than in previous years. With tax laws always subject to legislative change, it can be difficult to stay on top of the latest adjustments. That's where bringing in a trusted tax advisor can help.

When deciding exactly how much you will give to charity, it's important to consider a variety of factors. Donating to local organizations is a worthwhile cause, but it's also important to look out for the interests of your business. Don't donate an amount that will sink your business. Be smart as well as charitable.

"If you are going to donate $1,000, and let's say you get a $330 tax savings, you're still giving the other $670 away," Adams said. "Business and personal cash flow, in my mind, has to be first. They can't compromise even though they may want to give to charity."

Adams stressed the importance of both giving to charity and looking at your personal and business cash flows. In this same light, it's best to keep detailed records of charitable donations for your tax return. Most nonprofits will give you a standard form for tax-filing purposes.

Your business isn't limited to giving money. Volunteer work offers many of the same benefits as a generous monetary gift, and it sends a strong, positive statement to customers and your business's community. This is a tremendous option for businesses trying to save money, Adams said.

However, you can only write off certain expenses, like materials and not actual labor. You can't write off your employees' time volunteering at the animal shelter, but you can write off items like mileage.

Another concern that business owners often have is whether their money ends up in the right place. If you're going to donate money, you want to make sure it's put to good use.

It's not that difficult to find a public or private charity that aligns with your company and is known to use its money wisely. It takes some research, but your business should be able to support a charity that does good and is willing to accept your business's generosity responsibly.

"Do your homework," said Putnam-Walkerly. "Just because an organization is well known doesn't mean it's well run. There are many websites that provide a tremendous amount of information about nonprofits, such as GuideStarCharity Navigator and the Better Business Bureau Wise Giving Alliance. You can also pick up the phone, call the organization and ask to speak to the executive director. Nonprofit leaders should be happy to talk with potential donors about their organization and their impact and should be especially interested in building relationships with local businesses."

Fusaro-Pizzo suggests picking an organization that aligns with your brand. For example, a company with beach branding should get involved with organizations that advocate for clean water or ocean life.

It's also important to keep your chosen charity informed of your plans. Most organizations have a business outreach individual you can contact and coordinate with for your donation and any resulting PR. Even though the charity is a nonprofit, you still need its permission if you want to use its branding in any press releases or announcements you make to customers. Remember that contributions and gifts over a certain monetary threshold may also require written acknowledgment from the charitable organization.

While your business might have other people's needs at heart, online scammers try to take advantage of people's generosity.

Adrien Gendre, North American CEO at Vade Secure, believes businesses or individuals that donate to charity via gift card are at risk of being scammed. He said a scam that's on the rise is people or businesses being asked to purchase gift cards from nearby stores and provide the codes to scammers posing as charities. He says to avoid donations like this where almost nothing can be tracked.

Additionally, Gendre says to look out for well-designed email and website scams. If you receive an email soliciting donations that appears to be from a legitimate source, double-check the sender's email address and accompanying website to ensure you're not being duped by a minor change to the web address.

"Go on Google, type the brand, find the website from Google, and compare the URL," Gendre said when describing how to verify a website's legitimacy. "That's the easiest trick." Compare the two websites and URLs side by side to determine if the email sent to you is fake.

It's also important to understand the complexity of some scams. When it comes to email cons, studies suggest that scammers select days of the week to send phishing emails based on when people's inboxes are busiest. Don't fall into a trap because you're hurried on a busy day.

According to Gendre, the No. 1 red flag of a scam is someone trying to rush you into donating. There's never a reason why you or your business would need to quickly donate. If someone tries to pressure you to donate over email or the phone, it's a good idea to take a step back and question the legitimacy of the organization.

Before doling out cash donations (or donations of any kind), make sure the charity is legitimate. You want to work with legitimate nonprofit organizations rather than hastily donating to an organization that might not even exist. 

Additional reporting by Andreas Rivera. Some source interviews were conducted for a previous version of this article.

Bennett Conlin

Bennett is a B2B editorial assistant based in New York City. He graduated from James Madison University in 2018 with a degree in business management. During his time in Harrisonburg, he worked extensively with The Breeze, JMU's student-run newspaper. Bennett also worked at the Shenandoah Valley SBDC, where he helped small businesses with a variety of needs ranging from social media marketing to business plan writing.