The Tax Benefits of Giving

A Q&A with Eide Bailly CPA Anne Stoll

Giving is great—it feels good and oftentimes helps out the community, but something we often don’t talk about is the fact that it can also help the bottom line. We shouldn’t be ashamed of this! That’s why we sat down with tax expert Anne Stoll to get some answers on the benefits of giving.

Q: How can a business financially benefit from donating money?

A: Donations to a qualified organization can generate benefits for a business. Charitable donations can be deducted and reduce taxable income. Additionally, if a donation qualifies as a business expense, meaning the donation has a direct relationship to the business and there is an expectation the donation will generate additional revenue, it can reduce taxable income and generate additional revenues.

Q: Can a business benefit from donating food?

A: Businesses carrying food inventory can claim certain deductions. The amount of the deduction is generally limited to the lesser of either twice the cost of the food, or the cost of the food plus half of the gross profit the business would normally have received if they had sold the food.

There are restrictions to beware of, including:

• The business must donate the food to a qualifying organization.
• The donation must be from the trade or business of the donating business and must be of food intended for human consumption that meets all quality and labeling standards imposed by federal, state and local laws and regulations that also satisfy any applicable requirements of the Federal Food, Drug, and Cosmetic Act on the date of transfer and some time prior.
• In addition, the donating business will need to secure a written statement from the qualifying organization restricting the use of the food to be used in the qualifying organization’s exempt purpose or function, for the care of the ill, needy, or infant, and that the recipient organization will not transfer the food for money, other property or services.

Q: Can a business benefit from donating labor to a non-profit?

A: Charitable deductions for businesses that want to discount labor fees charged to a qualifying organization will generally be limited to the costs incurred for providing that labor. The business owner’s time is not deductible, and employment issues may arise if employees are required to donate time.

Q: Are there limits?

A: Business expenses are generally not subject to limitations, but a contribution deduction can be limited, and the limitation may vary depending on what is donated. Generally, the contribution deduction allowable on a business return may not exceed 10 percent of the business’s taxable income. If the contribution is of food inventory, the deduction may not exceed 15 percent of the business’s taxable income. For 2020 and 2021, the limitation was increased to no more than 25 percent of the business’s taxable income. For businesses that exceed these limitations, the excess contributions may be carried forward for up to five years. Sole proprietorships, S-Corporations, and partnerships that generally pass their income on to owners are also able report charitable contribution deductions to the owners that may be reported as an itemized deduction depending on the tax situation of the business owner.

Q: What organizations are eligible to accept these donations?

A: The most common qualifying organizations include churches and other 501(c)(3) organizations. There are other organizations that may be eligible to receive charitable donations, but these organizations may have additional restrictions on the donation for the business to be able to deduct the donation as a qualified charitable contribution.

Q: What are some common foot-faults?

A: It is important to verify that an organization is a qualifying organization at the time of the donation. Qualifying organizations are required to continuously follow specific IRS regulations to maintain their status as a qualifying organization, so organizations that had previously qualified may no longer qualify if they do not follow the IRS regulations. To help identify qualified organizations, the IRS maintains a detailed list of eligible organizations on their website at irs.gov/charities-and-nonprofits.

Documentation is also essential. It is important that the business/entrepreneur maintain reliable records showing the payment, such as receipts or cancelled checks. Additionally, the business must obtain written documentation from the qualified charity. The IRS has been very strict in this area and will disallow all or part of a donation if the required documentation is incomplete or missing.

Valuing a charitable contribution is not always straightforward. Businesses making non-cash donations will want to verify if the donation is limited to the cost of the item being donated, the market value of the donation, or some other value. Additionally, some donations may require the business to obtain a qualified appraisal in determining the market value of those donations.

Q: What else do we need to know?

A: There are many indirect benefits that businesses can realize from donating to qualifying organizations, but this is also a complex area that can create issues for businesses/ entrepreneurs if done incorrectly. Businesses wanting to give to qualifying organizations should check with their tax and legal counsel to make sure that any charitable giving program they wish to enact is being properly conducted and does not result in unintended legal, financial, or other consequences.