Here’s how to deduct charitable donations of different types, based on your business and the nature of the donation.
What To Consider Before Your Business Donates to Charity
If you are wondering if a donation could impact your company’s tax bill, there are some things you need to know about how different kinds of businesses can donate to charities. If your business is a corporation, the business can take a tax deduction for any donations, whether they are assets, cash, or investments. The deduction is considered a business expense on the corporation’s tax return. If your business is not a corporation—and you’re a sole proprietor, partner in a partnership, or an S corp—you can’t take a deduction for a donation on your business tax form. Instead, you can claim the deduction via your personal tax return (Form 1040) and you must itemize, using Schedule A. This deduction will reduce your personal income, but not your business income.
Valuing Assets for Donations
The Internal Revenue Service (IRS) allows two types of donations: cash and noncash, sometimes called “in-kind” donations. Donating cash is pretty straightforward, but donating property and assets is a little more complex. To donate property, you must first find its fair market value (FMV), to see if it has increased or decreased in value since you bought it for your business. If the property has increased in value, you may have to reduce the fair market value by the amount of the increase in order to figure your deduction. For example, if you bought a generator for $1,000, and its current FMV is $1,500, you may only be able to take a deduction for the $1,000. If you donate property that has decreased in value, your deduction is limited to the fair market value of the item at the time of the donation.
Special Rules for Donating Specific Assets
There are special ways to value different types of business property.
Capital Assets
Capital assets are long-term business property owned for investment purposes, including real property (land and buildings). They are subject to capital gains or losses, a different tax status than ordinary gains or losses. To set the value of capital assets you may be able to use the fair market value. But in some cases, you may need to reduce the fair market value by the amount of any capital gain if you sold the property.
Inventory
If you’re donating inventory (property your business sells), you can deduct either fair market value on the day you made the donation or its basis, whichever is smaller. The basis is any cost from a previous year that you would include in your opening inventory for the year you make the contribution. You can’t include your contribution in your opening inventory.
Intellectual Property
Intellectual property includes intangible assets like copyrights, patents, and trademarks. If you donate any of these, use the basis (original cost) of the property or the fair market value, whichever is smaller. You may also be able to take an additional deduction in the year of the contribution and following years, up to a total of 12 years, based on the income from the donated property.
Business Cars and Other Vehicles
You can donate a business car or a vehicle used mainly on public streets, roads, or highways. If the fair market value is more than $500, you can deduct the gross proceeds from the sale of the vehicle or its fair market value on the day of the donation, whichever is smaller. You must attach Copy B of Form 1098-C to your tax return or include a statement with the information on the form.
Documenting the Gift
How you document donations depends on the amount and the type of donation (cash or non-cash). It’s your responsibility to get a letter from the charity that acknowledges the donation whether you donate cash or assets. For all noncash donations, you must get and keep a receipt from the charity. The IRS is clear in stating that “without a written acknowledgment, the donor cannot claim the tax deduction.” For donations of $250 but not more than $500, you must have a written acknowledgment from the charity before you file your tax return or the due date of the return, including extensions. The letter should include the exact amount donated for cash donations. If your donation is more than $500 but less than $5,000, you must complete IRS Form 8283 Noncash Charitable Contributions and include it with your tax return, in addition to the acknowledgment. If your noncash donation is more than $5,000, you must have at-the-time written acknowledgment and you must complete Form 8283 and submit it with your tax return. There are also more special rules for donating vehicles, so check the IRS site or speak with a tax advisor to make sure you know how to claim the deduction.
