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Tax Effects of a Business Making a Charitable Contribution

Article Highlights:

  • Charitable Contributions 
  • Business-Related Charitable Contributions 
  • Charitable Pass-Through Deductions 
  • 20% Business Pass-Through Deduction 
Charitable contributions are generally allowed as part of an individual’s itemized deductions on his or her income tax return, while a business expense deduction generally isn't allowable for a contribution made to a charitable organization.

However, the IRS recently issued proposed regulations saying that if a taxpayer’s trade or business makes a contribution to a charitable organization with a reasonable expectation of financial return commensurate with the payment amount, the contribution could constitute an allowable deduction for trade or business expenses, rather than a charitable contribution deduction.

Example: Joe, who is a sole proprietor and a dealer in musical instruments, contributes $500 to a nearby church with the understanding that, as a result of the contribution, he will have an advertisement in the church’s concert program. The advertisement includes his business URL from which he sells musical instruments. Joe reasonably believes the advertisement will attract customers; therefore, Joe can treat the $500 payment as an ordinary and necessary business expense.

If no business benefit is derived or if the contribution is excessive for the amount of business benefit, then the payment will be treated as a charitable contribution by the business owner and deducted on the owner’s individual 1040 return, provided the owner is itemizing deductions. If the business is a partnership or an S corporation, a partner’s or a shareholder’s prorated share of the contribution will be passed through to the individual partner or shareholder on Schedule K-1, which also reports his or her share of income, deductions and credits from the business entity.

Making charitable contributions from a business entity has another negative side. Starting in 2018, most business entities (but not C corporations) enjoy a new tax deduction that is generally equal to 20% of the business’s qualified business income (QBI) and is passed through to the business owners for them to deduct on their personal 1040 returns. Basically, QBI is the business’s profit with certain adjustments. One adjustment that reduces the QBI is charitable contributions made at the business level. This is true even when the charitable contributions aren’t deductible and are passed through to the business owners.

It makes far more sense for self-employed individuals to make contributions personally and for partnerships and S corporations to distribute the amount of the intended contribution through to the partners or stockholders, so that they can make the charitable contribution personally, in order to avoid reducing the QBI, which will reduce the 20% deduction.

Long story short, there is no benefit in making charitable contributions from a business; in fact, doing so can have a detrimental tax effect.

If you have questions related to how this might impact you or your business, please give this office a call.



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Offices in Flemington, NJ and Califon, NJ

Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.

Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.

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Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.

Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.

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