Most Charitable Contributions are not business deductions for Proprietorships or Partnerships. Even if the business makes the donation, the IRS considers them as made by the business owner(s), not the business and they must be reported on the Schedule A – Itemized Deductions which may or may not provide a bonafide deduction to the individual depending upon their particular circumstances. Also, there are new, stricter regulations requiring complete documentation of all donations whether in cash or other than cash.
Position of the Internal Revenue Service:
There are occasions where a Charitable Contribution can be treated as a business deduction. According to the IRS, Charitable Contributions are NOT business expenses UNLESS:
- There is a direct relationship between your business and the gift
- You have reasonable expectation of a direct financial return that is commensurate with the amount of the donation.
If your business supports a Little League Team the costs can be treated as a business advertising expense deductible to the business or as a charitable donation that will be reported on your Schedule A, Itemized Deductions. The key is “How much money have you made from the parents and viewers of the team games?” If you make enough to cover the costs, it’s advertising and 100% deductible. If not, it’s charitable and goes to the Schedule A.
It is absolutely critical that you establish that the benefit to the business is relatively immediate and directly related to the contribution.
Having a Charitable Contribution treated as a Business Deduction has several tax reducing advantages:
The gift reduces net income for Income Tax purposes saving at least 10% in taxes.
The gift reduces net income for both FICA saving 15.3% on the first $65,400 of net earnings.
Business deductions are fully deductible but Charitable Contributions are limited to 50% of income.