Tax Breaks From Making Donations to Non-Profits

tax return form, glasses, pen and calculator on desk

Small and large businesses alike can greatly benefit from giving to the causes they most support. A gift matching or donation fundraiser is a smart marketing move, and it's a strategic way to align employees and customers with your brand's primary mission. The best way to conduct a gift-matching campaign or donation fundraiser is to make sure all collected funds are donated to a non-profit cause/entity. Keep reading to learn how small and large businesses benefit from tax breaks from making donations to non-profits.

Saving Money on Taxes With a Donation

Currently, the corporate tax rates are at 21%. This means if you can make a $10,000 charitable donation to a non-profit, you will save yourself $2,100 on business taxes. There are several federal rules that you must follow to qualify for a tax break on a charitable contribution, with the key here being to donate to a non-profit entity. 

It's important to understand that as a C corporation, you can write off up to 10% of your business income by donating to non-profits. There are some exceptions to this tax law. For example, the IRS currently advises that C corps can write off up to 25% of business income under charitable contribution donations as long as the donations were made as cash contributions and to a qualifying organization during the 2020 calendar year. 

If you're a sole proprietor or part of a partnership, you can't take advantage of the donation tax law. Why? Because you file your taxes in a manner that recognizes your earned income as personal income, and therefore, any donations you make are considered a personal contribution. This is why a lot of sole proprietors and partners decide to incorporate their brands into C corporations. 

It's also pertinent to understand how property donations are evaluated under the charitable contribution donation tax law. Generally, the fair market value of the property is what suffices as a base on which to judge the donation's value. This is why a lot of corporations decide to donate unwanted assets. Take for example your corporation bought a work truck 10 years ago for $22,000. Its current market value is $10,000, meaning you can donate it and reduce your taxable income by $10,000. Unless you think you can sell the truck for more than $10,000, it's wise to consider whether your brand could benefit from a sizable tax break and if so, making it smarter to donate the truck rather than going through the hassle of selling it. 

Things to Remember When Making Your Donations

  • Don't mark the donation to a specific individual (if you do, it won't qualify under the charitable contribution donation tax law)
  • Don't make it so that you're donating to receive a benefit of any type (e.g.. donations to a raffle don't qualify because you could win a prize in return)
  • You can't create a donation based on time and services provided
  • Your meal and entertainment expenses don't qualify

Final Thoughts

Want to learn more about the many reasons corporations just like yours give to non-profits? Check out these five things to know about gift matching and making charitable donations.