The philanthropic act of giving to those less fortunate is a great way to feel better about yourself and make the world better. In addition, you get to deduct that money as a charitable donation on your taxes! While you might get some monetary benefits, most of the benefits are undoubtedly incidental. This article will focus on maximizing the tax advantages for small businesses.
The Tax Cuts and Jobs Act, which affects 2018 to 2025 tax years, significantly increased the standard deduction amount. It’s become harder to itemize deductions since the bar is so much higher. For example, for 2023, a married couple filing jointly would need to exceed $27,700 (the standard deduction amount) to benefit from itemized deductions. That is a big hurdle for many taxpayers.
Charitable donations are part of itemized deductions; thus, if you don’t have enough to itemize, your charitable donations don’t provide a tax benefit. If you already itemize, then your tax planning for charitable donations is much simpler as you can simply choose how much you want to donate. However, if you want to maximize your tax benefits and don’t itemize your deductions, or aren’t sure if you do, follow these tips:
1: Donating from your company doesn’t automatically make it deductible.
If you own a pass-through entity, such as a sole proprietorship, a partnership, or S-corp, any charitable donations made by your company will pass through to your personal return. So the source of the donation (you or your company) ultimately will not matter. This is different for C-corps, which are allowed to take a deduction on the business.
2: Sponsorships are a great way to maximize tax benefits.
Alternatively, business owners can support their favorite charities through sponsorship opportunities. Unlike cash donations, where nothing is received in return, if you sponsor an event, your company gets exposure to potential clients and usually goodwill with all stakeholders for the charitable action. Since this is reciprocal, you can typically deduct the sponsorship as a marketing expense.
3: Services donated are not deductible.
You can’t deduct the cost of your services if you donate your time. This applies to regular employees as well as business owners. However, business owners can deduct the expenses the business incurs while providing services to a charity. So while you can’t simply deduct what you would have charged otherwise, you do get a small benefit.
4: Some donations are non-deductible.
Certain types of donations are not deductible. Make sure you are aware of them, and if you choose to make these donations, do so from a personal account and not the business. These include political donations, donations to universities where you receive event tickets, gifts to non-qualified charities, and raffle tickets.
Your ability to maximize the tax benefits from charitable donations will largely depend on your personal tax situation, specifically if you itemize your deductions or not. When you are not sure, it’s important to discuss with your tax professional in order to ensure you receive the most benefits. For business owners, the best strategy is to structure most donations as sponsorships so they can be deducted as marketing expenses.
This article originally appeared on Forbes