As an entrepreneur, small-business owner or investor, it’s important to ask your CPA before year's end about your options for donating to charity. By donating to charity, you can make a positive impact on the world and save big on taxes -- as long as you know how to legally apportion your contributions. Look closely at your bottom line now, and ask your tax-preparer these five key questions about what to donate, how to donate and what documentation is required to maximize your tax savings.
1. What organizations qualify for charity donations?
Always check with your CPA before making a major contribution to a charity to make sure they qualify. While many know that you can deduct donations to a nonprofit 501(c)(3), there are other organizations that will also qualify, such as churches and some trusts.
2. How does my business entity impact my charity donations?
There are differences between a C corporation and S corporation for charity deductions. A C corporation can only deduct 10 percent of its income. In comparison, an owner of an S corporation can deduct charity donations, as long as they do not take the standard income-tax deduction, up to 60 percent of their adjusted gross income for cash contributions and up to 30 percent for non-cash donations.
3. Can I deduct equipment, inventory and property donations?
As a business owner, you can deduct desks, computers or other equipment based on their fair-market value. For more expensive items such as jewelry, collectibles and real estate, you may need a written appraisal. When claiming in excess of $5,000 for donated property, the IRS will require a qualified appraisal and Form 8283. Ask your CPA for insights on how to best calculate this value.
4. Can I deduct volunteer time for employees?
If your employees volunteer time to a charity that your organization supports during a work day, your company may be able to deduct their salary, benefits and expenses for that time. Ask your CPA for help on how to document these types of events and your donations.
5. What is the best way to donate stock to charity?
Ask your CPA what you need to do to transfer stock directly to a nonprofit versus selling it to avoid capital gains. This way, you eliminate the gains on your stock while getting a deduction for the full value of the stock.
In all cases, ask your CPA what documentation is required for different types of donations. If it’s less than $250, a cancelled check or bank statement that shows your cash donation will be sufficient. For monetary gifts that exceed this amount, you will need a record in writing such as a letter.
Keep in mind that certain charity contributions receive state tax credits in many states, which give both a credit on state taxes and a deduction on federal taxes. And next year, don’t wait to make these proactive charitable donations at year-end only. Giving back should be a regular part of your monthly budget so that you can be even more strategic with your tax planning and contributions.