Giving to your church, school, or other 501(c)(3) charity is a noble act no matter how you choose to give.
But for the purposes of tax savings, some forms of giving are much more beneficial to you than are others. As a business owner, you can use some business strategies to get the money to these institutions as business expenses.
While this does not change anything from the institution’s perspective, it hugely increases your tax savings. The Tax Cuts and Jobs Act (TCJA) makes it harder to benefit from your personal donations.
Let’s say you donate $10,000 to a church, school, or other 501(c)(3) charity:
1. Will you get a tax deduction—in other words, will you itemize?
2. Will you benefit from the entire $10,000 as an itemized deduction? In other words, did the $10,000 simply put you over the hump that beat the standard deduction?
3. Say you can deduct all $10,000 as an itemized deduction. Would making it a business deduction increase the tax benefit value to you?
The TCJA made two big changes that make it less likely that you will itemize. First, the TCJA set a $10,000 limit on your state and local income and property tax deductions. Second, it increased the 2020 standard deductions (adjusted for inflation) to
• $12,400 for individuals, and
• $24,800 for married couples filing jointly.
Even if you make a big donation, think about the problem this creates—suppose you are married and donate $17,000 to charity. If this is your only itemized deduction, your donation does you no good because it’s less than $24,800. Fortunately, there’s a much more tax-savvy way to give.
As a business owner, you can make a few modifications and convert your church, school, and other 501(c)(3) donations to a different type of deduction—an ordinary business expense—which increases the tax savings that land in your pocket year after year.
To turn a charitable donation into a business expense, the donation has to be involved in some way in promoting your business. In one way or another, you need to prove that your strategy has as its purpose attracting customers and revenue for your business.
The tax law rule is that your donation must
• have a direct relationship to your business, and
• create a reasonable expectation for a commensurate economic return.
Here are four examples of successful business practices that benefit charities and create business deductions:
1. In the Marcell case, the owner of a trucking company contributed cash to a hospital because he wanted to impress the chairman of the charity drive, who was a potential customer. The court found that Philip Marcell had a reasonable expectation for a commensurate return on his donation and treated the contribution as a business expense.
2. ABC Company attaches rebate slips to some of its products that it sells to customers. The customers can then present the rebate slips to the charity, at which point ABC Company pays the charity the amount listed on the slip.
3. In Revenue Ruling 72-314, the IRS ruled that the stockbroker corporation that paid 6 percent of its brokerage commissions to the neighborhood charity could deduct the payments as business expenses because there was a reasonable expectation that the arrangement with the charity would direct new business to the brokerage and help retain existing business.
4. Sarah Marquis, a sole-proprietor travel agent, made payments to charities on the basis of business they did with her. She had 30 charities as clients, and those 30 charities accounted for 57 percent of her business.
In conclusion, to turn a charitable donation into a business expense, the donation has to be involved in some way in promoting your business.
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 laws and may find themselves in trouble with the IRS.