The new tax law will likely help your small business keep more of its money for 2018 and beyond. Still, certain deduction write-off changes came with the lower tax rates, so there are definitely some new rules to learn.
Make no mistake; I’m not a tax specialist, but I can at least provide some food for thought to prepare you for talking with your tax professional. So, if you want to continue giving back to the world, the following information should help you formulate the right questions to get your business on the right general track. Then talk with someone who is completely fluent in tax language as soon as possible. You have only six months remaining in the year to plan your company’s charitable giving.
Business Structure Affects Charitable Contribution Write-Offs
The nutshell view of how charitable giving works under the new law largely boils down to who pays taxes for the business. The tax-paying entity could be a single person or a number of people, but it’s also possible that the business pays its own taxes. Actually, this basic principle has probably not changed due to the new law, but it bears explanation, so here’s how charitable cash contribution write-offs apply to the most common type of business entities.
If you’re the only owner of your business — and the business is not a C-Corporation — then the responsibility for paying taxes on business profits passes through to your personal tax return on Schedule C. (The concept of pass-throughs is explained in Should Small Businesses Incorporate to Take Advantage Of The New Tax Law?)
But to write off contributions, you need to itemize all of your personal deductions — including charitable contributions — on Schedule A. If you opt to use the more-generous standard deduction when filing your return, then you will have no way to write off charitable contributions. If the higher standard deduction poses a problem for you in this respect, then I’d say that it’s a nice problem to have.
Partnerships are also pass-through businesses for tax purposes, but they work differently from sole proprietorships. Partners receive K-1 forms that show how earnings and expenses have been split between each owner. As such, charitable contributions made by these businesses are also allocated to the individual owners.
Of course, the entries from the K-1 form end up in each partner’s personal income taxes. In other words, the sole proprietorship rule applies here, as well. File Schedule A, and you can take the charitable contribution write-off. Choose standard deduction, and the write-off no longer applies.
Like partnerships, any charitable contributions are allocated to the S-Corporation shareholders and reported via Form K-1. Any shareholders who choose the standard deduction lose out on the charitable contribution deduction. Those who file Schedule A can take the deduction.
On the very off-chance that anyone reading this STARTicle has formed as a C-Corporation, it doesn’t hurt to know the rules. C-Corporations are the only entities that can actually directly write off charitable contributions without allocating them to shareholder, subject to IRS rules. In this case, the write-off would be filed on IRS Form 1120. Your accountant will know what to do.
Non-Cash Contributions Can Become Complicated
We all know that time is money … but not when it comes to charitable contribution write-offs. So, if you donate your time by coaching a local sports team or otherwise give of yourself, you probably should not plan on receiving compensation via a write-off for your time. Chances are that you cannot even write off pro-bono services (although related expenses are generally another matter).
Do you want to donate excess inventory or office furniture? Well, it may be possible for C-Corporations, but plenty of rules apply. What about employees who are allowed time off for charitable work? I would assume that you can still write off their salaries as a business expense, but, frankly, I’m not sure.
If a charitable contribution write-off for anything other than cash is important to you, I’ll say it again: talk to a knowledgeable tax professional first.
Contributions Under the New Law Seem Like Less Bang for the Buck
Like most small business owners, you are probably celebrating the savings you will realize from a much lower business tax rate. But, wait! Unless you have a C-Corporation, then the more-complicated personal rate brackets apply to your charitable contributions, too. These rates have changed, but not as dramatically as business tax rates.
Naturally, any reduction in tax rates also reduces the value of a charitable contribution write-off. The difference may be substantial, or it might not be very different. So, maybe it’s time to ask yourself whether tax write-offs are your primary incentive for contributing in the first place.
You’ll have to ask your tax professional to determine if any specific tax write-off is financially worth the expenditure. Personally, I believe that contributing to anything that has meaning to you is worthwhile, as long as you do the research to ensure that the recipient uses it wisely — and you can afford it.