A charitable contribution is defined by the IRS as a gift of cash or property to a qualified charitable organization, made voluntarily, and without receiving anything in return. Qualified charitable organizations are ones that have obtained 501(c)(3) status with the IRS.
If you have a sole proprietorship, LLC, are a partner in a partnership, or owner of an S corporation, you’ll report your business income and expenses as part of your personal tax return. This means that charitable contributions will also be reported on your personal taxes, Form 1040, Schedule A.
You are allowed to deduct up to 60% of your Adjusted Gross Income, including your business income (AGI) in cash donations, while non-cash donations are capped at between 20% and 50% of your gross income, depending on the type and value of the property.
These deductions can be beneficial from a tax standpoint because they reduce your total taxable income for the year. Note that this is different from a tax credit, which reduces the amount you owe in taxes.
Detailed steps for deducting charitable contributions
The first step to deducting charitable contributions is to decide whether you’re itemizing deductions or taking the standard deduction.
Because the standard deduction for tax year 2022 is higher than previous years, many businesses may not be able to itemize their charitable contributions. The standard deduction for 2022 is:
- $12,950 for single filers or taxpayers who are married and filing separately
- $25,900 for married couples filing jointly
- $19,400 for head of household
So unless your charitable contributions, plus all your other deductions, will push you over that threshold for your filing status, you’ll want to simply take the standard deduction.
If you are itemizing, you’ll need to ensure that you have documentation—in other words, proof—of each donation you’re claiming. You’ll list each deduction on Schedule A of Form 1040.
To avoid a last-minute scramble, keep track of each donation your business makes throughout the year as you make it. If you use a bookkeeping platform like Bench, these contributions will be automatically categorized as charitable contributions, making it much easier to file taxes come tax time.
Essential documentation required
For financial contributions, acceptable documentation includes:
- A receipt (physical or virtual) or an email from the organization that shows the organization's name and the amount and date of the contribution.
- A canceled check or bank statement showing the name of the nonprofit you donated to, as well as the date and the amount of your contribution.
- Payroll deduction records showing the organization's name and the amount and date of the contribution.
Financial contributions equaling more than $250 require that you have written acknowledgement from the organization. This acknowledgment should include the amount you gave, whether you received any goods or services in return, and if so, an estimate of the value of those goods or services.
For non-cash contributions, such as property, equipment, vehicles, services, etc., required documentation is as follows:
- If the value of the contribution is less than $250, you’ll need a receipt from the organization showing the organization’s name, a description of the contribution, and the date and location of the contribution.
- If the value is between $250 and $500, you’ll need what’s called “contemporaneous written acknowledgement.” That’s a written acknowledgment of the contribution that includes a description of the donation as well as a statement of whether the organization provided any goods or services in return and the value of those goods or services.
- If the value is between $501 and $5,000, contemporaneous written acknowledgement is required and you’ll also need to fill out Form 8283.
- Finally, if the value is above $5,000, contemporaneous written acknowledgement, a written appraisal of the property from an appraiser, and Form 8283 are required.
Note that you will also need the federal tax ID number of each organization that you donated to in order to claim those donations as deductions.
Mistakes to avoid when claiming deductions
Because there are many rules governing the different types of donations, you’ll want to double-check that you’re following the right guidelines for each contribution.
Ensure that you are requesting the required documentation from the organizations you’re donating to as you make each donation. Nonprofits often provide their donors with year-end statements, but if you’ve contributed non-cash items or made major donations, you may need to ask for more detailed acknowledgements.
How Bench can help with charitable contribution deductions
Business owners have enough to do to run their businesses, support their communities, and keep their customers happy. Managing your books doesn’t have to be part of it. Bench’s online bookkeeping platform and human bookkeeping team can make sure every charitable contribution you make is tracked, documented, and easy to find when tax time rolls around. When it is time to file, Bench Premium members can use our unlimited tax advisory services to ensure that they’re getting the maximum benefit from each deduction, plus the peace of mind that your taxes are being done accurately and on time. If you haven’t given Bench a try, sign up today and get one month of your books done for free—no strings attached, no credit card required.