It’s an amazing thing when your small business finally turns a profit. It’s such a great, anxiety-relieving milestone to reach. You know what’s even better? When you make enough money to give back and donate. If you’re reading this post, I’m guessing you fit into this category. I love that you made that investment in your community.
Or maybe… You had a great start last year, but your goal for this year is to be able to donate using money from your business. If that’s the case, stay tuned! If you’re going to make a donation, might as well do it in a way that will benefit you come next year.
So now that it’s tax season, it’s time to be a little selfish again, right? I know that if documenting your donations means you can save some tax money, you want to make sure you do it correctly!
It’s important to consider what type of business you have. Your business structure can determine what you can and cannot do as far as deductions. S corporations and C corporations are whole other animals, of which honestly, I don’t specialize in. If you fall into one of these categories, I recommend consulting your local accountant.
If you have an LLC or are a sole proprietor, you’re in the right place. First, let’s see what the IRS’s official statement is on deducting donations: “If your business received any benefit of the donation, then you deduct the donation as an advertising expense. Otherwise, your charitable donation or gift is not deductible under your business but may be tax deductible under your Schedule A if you itemize your tax deduction for personal tax returns.”
WHEW! That was a mouthful. Are you ready for the everyday explanation? Let me paint a picture for you.
Last year, my husband’s and my company sponsored my son’s football team. In return for the donation, we were able to put our company name on the jersey sleeves. This is a form of marketing, which meant that we benefited from the donation, making it tax deductible. However, when our company donated snacks and drinks after some of the games, we did not benefit, so the donation was not tax deductible.
Likewise, when our company made an anonymous donation at a charitable event, we did not benefit because no one knew we made the donation. Therefore, we could not deduct the donation.
It’s easy to understand these rules in terms of money, but this can be tricky when you’re talking about a product-based business. What about when you want to donate your product? Let’s dive deeper.
A few years ago I donated party packs to my daughter’s PTA school carnival. The retail value of the pack was $55, however the product cost was only $12. My logo was on the box, and my name was on a promotion banner at the event.
Was I able to deduct this? In short, yes.
Since my logo was on the box and the school advertised me on their banner, I received advertising space, from which I benefited. However, I could only write off the $12 cost of the product.
When donating a product, you can only deduct the cost, not the value.
Furthermore, if I had not received any recognition from the event, even with my logo on the boxes, I would not have been able to deduct the expense on my business tax return. The benefit from donating needs to be in return from the donation.
All of this said, if I had to recommend one of the two ways of donating, I would pick donating money over products. If you sell your products, you’ll get a much better return than the organization will. You can then use that extra money to write a check.
Sponsoring a youth sports team is a fantastic investment. Youth sports really need the money to be sustained, and it’s great marketing for your business. If you aren’t already connected to a team through a friend or family member, reach out to your local Parks and Recreation department to find out how to set up a sponsorship.
When you invest in your community, your community will be more likely to invest in you. And then you can write off the expense on your taxes! It’s a win-win situation.