Tips for Getting the Most out of Your Charitable Contributions

Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.

Tips for Getting the Most out of Your Charitable Contributions

Thinking about charitable contributions for tax year 2020? While many small businesses are recovering from unprecedented and challenging times, others are looking for ways to give back both personally and financially to their communities. Charitable giving can not only make a difference to a cause that has meaning to a small business owner, but also provides a way to connect with customers or other businesses. Earlier this year, the CARES Act made possible several changes to tax law that incentivize charitable contributions for individual taxpayers and corporations alike.

New for 2020 Tax Returns

The IRS limits the amount of cash contribution an individual taxpayer can deduct on Schedule A to a percentage (generally no more than 60 percent) of adjusted gross income (AGI). For tax year 2020, the IRS has temporarily suspended these limits; taxpayers can deduct charitable contributions of up to 100 percent of AGI. Such contributions must be made during the calendar year 2020, in the form of cash, and to a qualified organization.  Corporations may deduct qualified charitable contributions of up to 25 percent of taxable income (up from the previous limit of 10 percent). Charitable contributions that exceed taxable income limits can be carried forward by both individuals and corporations for a period of up to five years.

The deduction limitation available to both corporate and non-corporate taxpayers for charitable contributions of food inventory has also seen a temporary increase for tax year 2020. For individual taxpayers the deduction is limited to 25 percent of aggregate net income (up from 15 percent in previous years). Deduction limitations for corporations is limited to 25 percent of taxable income. To qualify for this enhanced deduction, donations must be made to a Sec. 501(c)(3) organization and must be used for the care of the ill, needy or infants.

For those individual taxpayers that opt to take the standard deduction for tax year 2020 rather than itemize deductions, an above-the line deduction, up to $300, is also available. To qualify, an individual must donate cash to a Sec.501(c)(3) public charity. This universal deduction will reduce adjusted gross income by up to $300.

Types of Charitable Contributions

Charitable contributions can be in the form of cash (includes check or other monetary gift) or noncash property (inventory, vehicles, and investments). In addition, charitable contributions must be made to qualified organizations to be deductible. Charity to an individual is never deductible regardless of how needy a person might be. In the event you receive a benefit from making a contribution to a qualified organization, your deduction is restricted to the difference between the amount contributed and the benefit received.

Impact of Business Structure on Deductions

Small business structure will affect the treatment of charitable contributions. Because the IRS does not recognize an LLC as a business structure for federal income tax purposes, limited liability companies are treated the same as sole proprietorships, partnerships and S-corporations when donating to charity. Contributions for the aforementioned business structures are not claimed by the entities, rather contributions pass through to the personal tax returns of the owners who file IRS Form 1040 and itemize deductions on Schedule A.

Before filing your small business corporate or individual tax return, make certain to obtain a written acknowledgement for any gift of $250 or more. This receipt from a qualified charity should include the charity name, the date and the amount of the contribution.