Tax planning to classify payments to charities as business expenses has been around for some time when lawmakers put limits on the charitable contributions and when 2017 tax reform (TCJA) almost doubled the standard deduction amounts. The planning history makes good news for you. Both IRS revenue rulings and court cases show you several paths that you can follow to create business deductions for the money you give to charities.
You might ask, “Why bother if I already deduct charitable contributions?” Answer: you usually save tax dollars when you can claim an otherwise personal deduction as a fully deductible, tax-favored business expense.
First, if you donate $5,000 to a charity and don’t itemize deductions, you receive a zero tax benefit for your donation. But if you make the payment to the charity so that it qualifies as a business expense, the business gets the deduction and you get the business benefit.
Second, if your business, rather than you personally, deducts the money you give to charity, you save the self-employment or payroll taxes, depending on how you operate your business. That’s a nice start on keeping more of your hard earned money in your pockets, where it belongs.
Now that you know how you can benefit with the business deduction, let’s turn to what it takes for a business to get that charitable deduction.
The IRS Says . . .
The IRS says that you deduct payments to charity as
(1) charitable contributions if they are completely gratuitous, or
(2) business expenses if they bear a direct relationship to your business and you make them with a reasonable expectation of financial return commensurate with the amount paid.
In conclusion, if your business makes the payments directly to the charity and these payments are tied to the business or expected business from the charity, then this payment is a business expense. Happy Saving!
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.