How Do Tax Deductible Donations Work for Corporations?
The right for corporations to deduct charitable donations from their taxes was established in 1935. Today, corporate philanthropy is a consistent feature for most of the world’s biggest brands, to the point where corporations donated over $21 billion to nonprofit organizations in 2019. Yet no matter how straightforward the motivation for businesses, the rules surrounding tax-deductible donations are complex. Here’s how donations work and which vehicles offer the most compelling benefits.
What Are Tax Deductible Donations?
The fundamental provision of tax-deductible donations, as set out under section 170 of the Internal Revenue Code, is that donations to nonprofit organizations with tax-exempt status (see IRC 501(c)(3)) reduce the overall tax burden for the donor corporation within that particular tax year (the IRS provides a useful search tool for looking up the tax-exempt status of an organization). With some exceptions, only funds or foundations within the United States qualify.
Corporations can donate the following:
- Cash: still the most common form of tax-deductible donation. Often, corporations will sponsor a charitable event and then match whatever funds are raised by employees.
- Inventory: in the form of supplies and equipment. Tax is deductible on half the difference between the cost of inventory and its fair market value (which cannot be more than twice the cost of the inventory).
- Real estate: rather than selling property and giving the proceeds to a nonprofit (which would incur capital gains in the long term), corporations can donate it to a donor-advised fund (DAF) and receive the current market value tax deduction with no capital gains.
How Do Tax Deductible Donations Work?
The regulations vary for different types of corporations, but some rules apply across the board. Tax-deductible donations cannot be for personal or shareholder benefit, for example, so the purpose must be philanthropic. Similarly, contributions must be made before the end of the tax year. Arguably the most important rule, however, is that nonprofit contributions cannot exceed 25% of taxable income (excluding disaster relief). Until recently this figure was 10%, but the IRS extended the limit (temporarily) in 2021 in response to the COVID-19 pandemic. Any excess donations over the threshold are carried forward for five years, after which tax deductions no longer apply.
Deductible donations by corporation:
- C corporations, in which the corporation is taxed separately to the shareholders and owners, are the only business structure that can write off a nonprofit donation directly.
- Sole proprietors have to report nonprofit donations as an itemized deduction on their personal tax returns (Schedule A). Donations cannot be deducted on Schedule C, where business income is declared.
- S corporations and partnerships also have to report donations on the individual tax return of each shareholder. In this case, the value of the corporate donation is divided up amongst each shareholder.
No matter what kind of structure a business has, it is required to maintain full records (receipts, registered charity numbers, bank statements, etc.) of any nonprofit donations to qualify for tax deductions. If the cash donation is over $250, there must be written acknowledgment from the tax-exempt fund or foundation, while for non-cash donations over $5,000, there must be a written property valuation from a qualified appraiser.
What Are the Benefits for Corporations?
While the prospect of a tax write-off, depending on how the business is structured for tax purposes, is a clear incentive, it’s not the only motivation. Donations to nonprofit organizations also foster community goodwill, fortify the corporate mission and improve culture and employee engagement. Increasingly, consumers want to see greater evidence of their favorite brands driving change within their communities, either on a local or national level.
Finding the Right Vehicle for Tax Deductible Donations
Changes to the tax law in 2017 nearly doubled the standard deduction for most individual taxpayers, meaning that there’s now less incentive to itemize deductions as opposed to “bunching” them. As a result, there are even more advantages to donating through DAFs, since these allow corporations to make several years of contributions in a single (typically windfall) tax year.
DAFs also offer some attractive advantages compared to donations through corporate foundations. For a start, there is no minimum annual giving requirement for a DAF, and contributions are not publicly reported. That allows corporations to make a larger donation within a single tax year, without having to decide immediately where those donations should be allocated. Because a DAF is managed by the sponsoring organization, the responsibility for disseminating funds does not fall on the corporation, so fewer personnel and resources are required. The corporation just has to establish how much it wants to contribute within the current tax threshold.
For any corporation looking to unlock the financial and brand value of nonprofit donations, Groundswell can provide professional expertise in contributing through a DAF or private foundation. Learn more about boosting employee engagement, supporting the wider community, and trimming your next tax bill with Groundswell.
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