If your small business has had a successful year, you may be feeling generous as the tax year comes to an end. There are several benefits to providing employee bonuses, volunteer labor, and charitable donations, and some of them extend to your tax obligation.

Donating money to any charity is a really good thing, but don’t expect all of the donations you make to be tax deductible. In some cases, a donation might not be deductible at all, and in other instances, a donation has to come with the right paperwork in order for your Fort Collins CPA to list that deduction.

Since your heart is in the right place, you want to be sure that your act of charity is reflected in your year-end tax return. There are several simple rules that you will need to be aware of. Here are some things about charitable deductions that you need to know before you decide to donate. (But even if you can’t deduct a donation, donating money to a good cause is always a good idea!)

What is Deductible?

Generally, cash or property donations to a qualified charity are tax deductible for the calendar year in which they were incurred. Like other deductible expenses, documentation is required for charitable donations that include receipts from approved tax-exempt entities. The IRS meticulously designates 501(C) (3) tax-exempt status to non-profit institutions that serve the public good, but not all donations to tax-exempt entities will be tax deductible.

There are three basic classifications for charitable organizations. A public charity is largely supported by public donations, a private foundation may be supported by investments to issue awards and grants to individuals or other charities, and a private operating foundation uses its funds to directly support a specific charitable cause. When you donate cash or property, this amount can be added to your itemized deductions for up to $500 on IRS form 1040. Although no specific value is deemed deductible from volunteer work, costs incurred from fundraising events are considered deductible expenses.

Limitations and Regulations

All donations must be recorded with receipts verifying the tax-exempt status of the charitable organization. Certain donations, such as political contributions, professional organizations, labor unions, or individuals, are not eligible for a deduction, but donations to approved religious charities are often tax deductible. Non-cash donations of property, such as a vehicle, equipment, or real property, can be deducted for substantiated fair market value. A written appraisal is required for non-cash donations valued above $5,000. Many charitable organizations offer verification of donation value for certain items.

The IRS limits charitable deductions based on its portion of your gross income. For cash donations, up to 50% of your gross income can be claimed. For donations of property, up to 30% may be deductible. Your charitable contributions from capital gains assets can also be deducted up to 20% of your gross income. Promises or pledges to donate do not constitute a deductible donation. Property must be exchanged and cash must actually be donated for you to claim deductions. Donations under $500 can be included on the itemized section of form 1040, while all donations in excess of $500 must be included on an attached form 8283.

How Much to Claim?

You can’t claim more than 50% of your Adjusted Gross Income (AGI) in most cases – though this isn’t always the case. Confusing, right? Sometimes, you can only claim 30%, and the amount that you can claim really depends on what you donated. See how tricky this can be? That’s why it’s important to call your Fort Collins CPA to get the numbers right. If you don’t deduct charity donations properly, you might be facing an audit.

Further, any donation over the amount of $250 must have a formal letter of acknowledgment from the charity. The letter must also include the amount donated and the fact that no goods or services were exchanged as part of this donation. Without all of these things, your Fort Collins CPA can’t make that deduction.

Other Deductions and What to Watch Out For

Your charity that extends to other organizations, such as employee benefits and bonuses, or gifts to certain non-profit institutions, including some hospitals and credit unions, cannot be deducted as charity but may qualify for a business expense deduction. Your contribution to employee retirement plans or health benefits can also be deducted as a business expense. Your accountant can help you determine which expenses are deductible and how to maintain accurate records of all deductible expenses to maximize your tax savings.

Although most of the organizations that solicit donations in person, by phone, or through the mail, are approved 501(c)(3) companies, recent trends in opportunism have seen the proliferation of fraudulent organizations that solicit funds in the wake of a natural disaster. The IRS warns against donating any money or property to an organization that can’t prove its 501 (c)(3) status. Along with the variety of discrepancies and fraudulent reporting tactics that IRS agents are continually on the lookout for, fraudulent charities threaten the financial stability of taxpayers who assume their donations will be deductible.

Some items to check in regard to your charitable donations BEFORE or AT THE TIME of donating are:

• Qualified organization or charity: a lot of smaller charities are not recognized charities. What does this mean? Basically, recognized charities have paid the funds to be considered “qualified” charities according to the government’s definition. If you have donated to a charity that is not recognized, you can’t make a deduction. If you are planning to donate with a deduction in mind, make sure that the charity you pick is actually qualified according to the U.S. Government.
• The right documents: if you just handed a charity $50 in cash, but you didn’t get any proof of that donation, you can’t claim it. The lesson here is simple enough: always get a receipt or proof of donation from that recognized charity.
• Not necessarily cash: most charities ask for a cash donation, but did you know that you can deduct a non-cash donation too? If you donated any other kind of object or good to a charity, you can still deduct the worth of those items – just get that documented proof.

Types of Recognized Charities

Here are the trickier details – the government only recognizes certain types of charities, and those are the following:

• Public charities (Red Cross, Goodwill, Salvation Army, etc).
• Government organizations (local or federal)
• Religious groups
• Non-profit fire departments, schools, and hospitals
• War veteran groups
• Public recreation and park groups

But, again, make sure that they have the right paperwork. Even if you donate to a war veteran group, that group has to have the paperwork lined up, or your Fort Collins CPA can’t make that deduction for you.

Making the Most of Your Generosity: Getting Your Small Business Accounting Right for Charitable Contributions & Tax Deductions

Whether you run a business or not, your taxes should reflect your generosity.

Small business accounting can be really tricky, and these rules are just the basics. If you need help with your small business account, make sure to call Steven J. Wick & Associates, PC today to set up an appointment. We fully support any donation given to any worthy cause but do keep in mind that the government places certain restrictions on donations when it comes to how much you can and can’t deduct. We know that small business accounting is tricky, but we’ve got you covered — we’ll make sure your deductions are in line before tax season arrives.