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A Look Ahead: Be Wise When Making Charitable Contributions

By Marcia Richards Suelzer, MA, JD | December 16, 2013

'Tis the season to be charitable. Although every charity will tell you the need is year-round, the holiday season usually prompts an increase in charitable giving. Small businesses have a track record of generous charitable giving—with more than 89 percent believing it is important to donate money to charities, according to a recent study conducted by Independent We Stand.

And, while tax savings might not be the primary reason for this increased generosity, it's well known that charitable contributions can help you save taxes. However, if you want to get the maximum benefit, you must carefully follow the rules.

Work Smart

While making charitable contributions can reduce your immediate bottom line, a well-thought out giving strategy can be a source of publicity and improve your image with customers. When selecting between many worthwhile causes, it pays to consider which ones are a natural tie-in for your business and will resonate with your customers.

For example, donations to a local food depository would be a natural fit for a restaurant, a food retailer or a food manufacturer. A sporting good store might donate to a youth sports organization.

No matter how you feel personally, it is sound business practice to avoid donating to either side of a highly polarized issue.

Contributions by Pass-Through Entities Are Claimed on Owners' Forms 1040

If you operate your business as an LLC, S corporation or partnership, the deduction for the charitable contribution will be claimed on your own tax return. (It still makes good business sense to identify your donation as being from your business, regardless of how the tax reporting occurs.) Charitable deduction are itemized deductions, so if you claim the standard deduction, you cannot claim a charitable contribution deduction.

Not Every Organization Qualifies as Tax-Exempt

If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. You cannot deduct contributions made to specific individuals, political organizations and candidates. You will often hear the term "501(c)(3) deduction," which is the Internal Revenue Code subsection that most charities use to qualify for tax-exempt status, although charities can qualify under other subsections. 

The following are common types of charitable organizations.

  • Churches, a convention or association of churches, temples, synagogues, mosques, and other religious organizations
  • Most nonprofit charitable organizations such as the National Alliance on Mental Illness, the Red Cross or the United Way
  • Most nonprofit educational organizations, including the Boy (and Girl) Scouts of America, colleges, and museums
  • Nonprofit hospitals and medical research organizations
  • Utility company emergency energy programs, if the utility company is an agent for a charitable organization that assists individuals with emergency energy needs
  • Nonprofit volunteer fire companies
  • Public parks and recreation facilities
  • Civil defense organizations

Even if the organization falls into one of these categories, it still must have applied for and have been granted tax-exempt status. And, it must have been tax-exempt at the time you made the contributions.

The IRS has made it easy to verify that your charitable contributions are going to a tax-exempt charity. The "Exempt Organizations Select Check" is an online tool provides an efficient way to search for eligible organizations. The Exempt Organizations Select Check data is updated on the third Monday of each month.

Work Smart

The IRS tool will tell you only whether the organization qualifies as a tax-deductible charity.

It does not have any information regarding whether those deductions are being used for direct services to recipients or for administrative, marketing and other overhead costs

For this information, as well as other information on a charity's overall financial health and accountability, visit Charity Navigator.

Value of Gift Determines Amount Deductible

If your charitable contributions consist only of cash and you do not receive any merchandise in exchange for your contribution, then it's easy to determine your deduction. In nearly all cases, it will be the amount that you contributed. However, if you receive a benefit, such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received. The receipt that you receive from the charity should indicate the value of the gift item.

Example

You donate $75 to your public television station during its pledge drive. In return for this contribution, you receive a travel book that sells for $25 in a book store. The amount of your deductible contribution is $50

Donations of stock or other non-cash property are usually valued at the fair market value of the property.

Tip

Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

Special rules apply to vehicle donations. For guidance on determining value, refer to IRS Publication 561, Determining the Value of Donated Property.

You Must Prove Amount of Contribution

Regardless of the type of contribution—cash, clothes, collectibles or cars—you must be able to substantiate the contribution. The requirements for substantiation vary based upon the type of property.

Cash contributions. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. (Remember, the value of merchandise received reduces the amount you can claim.)

Tip

Making a donation by texting a certain number on your phone is rapidly becoming a very popular way to make a small donation for emergency relief. According to the IRS, if you make text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given

Non-cash contributions. For a contribution not made in cash, the records you must keep depend on the amount of the contribution that you claim. Special rules apply for donations of used automobiles based upon the amount that you claim as a deduction.

Amount Claimed Documentation Required
Less than $250 A receipt from the charity showing: its name, the date and location of the contribution and a reasonably detailed description of the donated property.
At least $250 but not more than $500 An acknowledgment from the charity of the contribution, in addition as required above.
Over $500, up to $5,000 Complete Form 8283, Noncash Charitable Contributions, and file it with your return.
Over $5,000 Obtain an appraisal of the property; complete and submit Form 8283 with your return

IRS Provides Information to Help You

The IRS has gathered all the resources related to charitable contributions on their webpage "Tax Information for Contributors." In addition to the database mentioned earlier, these resources include:

Tax Center

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