Charitable Deduction vs. Business Expense (2024)

October 10, 2016

By William Boiman, Manager, Tax & Business

The Internal Revenue Service (IRS) has released various guidance stating that a charitable payment which bears a direct relationship to the taxpayer’s business, and is made with a “reasonable expectation of financial return commensurate with” the amount of the transfer, is not a charitable contribution. Instead, the transfer or payment may be deducted as an ordinary business expense (unless it is an expenditure that must be capitalized).

This can be extremely advantageous to some taxpayers due to the various limitations associated with charitable contributions. Charitable deductions are limited to 50% (30% in some cases) of the taxpayer’s Adjusted Gross Income. They can also be phased out as an itemized deduction on Schedule A due to the amount of the taxpayer’s income. In contrast, an ordinary business expense will reduce a taxpayer’s income dollar-for-dollar.

The IRS has also ruled that a strictly contractual obligation on the part of a charity isn’t required, as long as the consideration justifies a “reasonable expectation” of financial return. To entitle the taxpayer to a business expense deduction, the expected return must be:

Of a financial nature; and
More than nominal, “commensurate with” the payment or other transfer.

Taxpayers must remember that a payment to a charitable organization won’t be deductible as a business expense unless it’s clearly shown that the contribution was made in the furtherance of business purposes, and was not a mere gift. For example, if a business makes gratuitous contributions with the intention of deducting them from its income as a business expense, a clear intention to increase the volume of business should be evident. Some examples of these could include:

A contribution to a charity to please a potential customer who is head of the fund-raising drive. The actual purpose of the gift is to influence the customer.
Payments made to 30 or so charitable organizations that regularly made bookings with the taxpayer’s travel agency. About 57% of total billings come from these organizations, and payments were geared to the amount of business and its profitability.

However, cash payments to a hospital by a seller of surgical and office supplies are considered contributions as no additional business was expected in return. The contribution was simply a gift for the betterment of the hospital.

Charitable Deduction vs. Business Expense (2024)

FAQs

Is a charitable deduction the same as a business expense? ›

For example, you donate $100 to support a local organization and, in exchange, they advertise your business in a program. This illustrates a business expense and not a charitable deduction. If the payments are gifts or charitable contributions, they cannot be deducted as a business expense.

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How much can I say I donated to charity without being audited? ›

For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property other than cash contributed.

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How much can a business write off for donations? ›

Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year.

How much do charitable deductions reduce taxes? ›

Generally, itemizers can deduct 20% to 60% of their adjusted gross income for charitable donations. The exact percentage depends on the type of qualified contribution as well as the charity or organization.

Can a small business deduct charitable donations? ›

Charitable donations can significantly affect small business taxes by creating tax deductions. For your donation to qualify for a tax deduction, your chosen charity must be a bona fide 501(c) (3) organization. Use the IRS search tool to confirm the group is registered.

Can small businesses write off charitable contributions? ›

Charitable contributions can qualify as tax deductions against a business's annual tax liability. Generally, up to 50 percent of adjusted gross income can be deducted. Be sure to check with your tax professional on which charity contributions can be deducted.

Do you get a bigger tax refund if you donate to charity? ›

Charitable contributions are generally tax deductible, though there can be limitations and exceptions. Eligible itemized charitable donations made in cash, for instance, are eligible for deductions in the year the donation was made, but are limited to a percentage of a person's income, often 60%.

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Why don't my charitable donations reduce my taxes? ›

When I entered my charitable donations on my tax return my refund did not increase. Why would that be? Share: To benefit from itemizing a charitable donation tax deduction, your itemized deductions must be more than the standard tax deduction.

Do you get more taxes back if you donate to charity? ›

Charitable contributions to an IRS-qualified 501(c)(3) public charity can only reduce your tax bill if you choose to itemize your taxes. Generally, you'd itemize when the combined total of your anticipated deductions—including charitable gifts—add up to more than the standard deduction.

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Are charitable contributions considered an expense? ›

Charitable Contributions: Many businesses choose to deduct their charitable contributions directly, rather than categorizing them under another expense category. This is because charitable contributions are tax-deductible.

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Is a charitable contribution an expense? ›

Charitable donations are part of itemized deductions; thus, if you don't have enough to itemize, your charitable donations don't provide a tax benefit.

Are charitable donations tax deductible for a small business? ›

Tax Deductions

Most charities or non-profits operate as tax-exempt 501(c)(3) organizations and donations to them are tax deductible. Such donations include cash, volunteered services, sponsorship of local charity events or the donation of inventory or services.

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What constitutes a charitable deduction? ›

The charitable contributions deduction reduces taxable income by allowing individual taxpayers and businesses to deduct contributions of cash and property to qualified charitable organizations. The amount deducted in a year is subject to limits that depend on the type of donation and how individuals file their taxes.

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