The IRS offers tax deductions for any donations made to charities over the course of the tax year. Individuals and businesses alike can declare their donations on their federal tax returns. However, to claim these deductions, you must have the right paperwork on hand to back up your claim. Here’s what to know if you choose to give back and take advantage of the IRS incentives for doing so.
[Read more: How to Choose the Right Charity for Your Business]
Which organizations can you give back to?
Ideally, you should give back to an organization that needs your support. Experts advise not to make your decision to donate to a cause based on your ability to get a tax deduction. Support an organization with a mission you believe in, or one in which you believe your customers support.
If you are seeking a tax deduction, start with the IRS’s definition of a charitable donation — it’s a little complicated. The way the IRS treats a charitable contribution varies according to:
- The recipient organizations.
- What you donated (e.g., cash, time, in-kind contributions, etc.).
- Whether the donor was an individual, business, or corporate donor.
- How much was donated (in dollars).
There are different standards and ceilings for each of these variables, so let’s take a deeper look at each factor.
To claim a charitable contribution deduction, the recipient organization must be registered as a tax-exempt organization as defined by Section 501(c)(3) of the Internal Revenue Code. You can search for an organization's eligibility to receive tax-deductible charitable contributions using the IRS’s Tax Exempt Organization Search Tool. Note that the limit you are able to deduct applies to all donations you make throughout the year, no matter how many organizations you donate to.
What you donate is the next consideration. Cash donations are deductible, which we’ll cover in a later section. You can also donate time (by volunteering) or property; while you won’t be able to deduct the value of your service or time, you can deduct expenses related to volunteering.
Next, as a company, it’s worth noting that you can’t deduct charitable donations as business expenses. The way your business is structured also impacts the way you take deductions. For instance, if a partnership makes a charitable contribution, each partner takes a percentage share of the deduction on their tax return. If you’re unsure about the share of the deduction to take, consult with a CPA.
With those caveats out of the way, here’s how much you can deduct in charitable contributions.
Generally, you can deduct up to 60% of your adjusted gross income in charitable donations. However, depending on the type of organization and type of contribution, you may be limited to 20%, 30%, or 50%.
How much can you deduct in charitable donations?
Generally, you can deduct up to 60% of your adjusted gross income in charitable donations. However, depending on the type of organization and type of contribution, you may be limited to 20%, 30%, or 50%.
The limit to how much you could claim temporarily changed in 2021 due to the CARES Act, passed in response to the pandemic. The CARES Act eliminated the 60% limit for cash donations to public changes. In addition, single taxpayers could deduct up to $300 of charitable contributions made in cash; married couples filing joint returns could claim up to $600 for cash contributions. However, this benefit has since expired and does not apply to taxes filed in 2023.
[Read more: 10 Tax Deductions Your Business Should Know About]
How do you claim these deductions?
It’s imperative that you document all charitable contributions. Sole proprietors, partners in a partnership, or shareholders in an S corporation report charitable contributions made by their business on Schedule A (Form 1040). Keep detailed records of your deductions and include the type of donation and the amount that you contributed.
For monetary donations, save your bank statement, credit card statement, and a receipt from the charity that shows the date, amount, and name of the organization. For cash or property donations over $250, the IRS will ask to see a written letter of acknowledgment from the charity. This letter will need to include the amount of cash donated, whether you received anything in exchange for your donation, and the estimated value of goods or services (if applicable).
Finally, if you intend to deduct at least $500 worth of noncash donations, you will need to fill out Form 8283. If the items you donated are worth more than $5,000 total, include an appraisal of your items. Many 501(c)(3) organizations are well-versed in these record-keeping procedures, but make sure you consult a CPA if you have any questions.
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