Understanding Charitable Contributions
Let’s Define The Limits
Before we get into the specifics of what types of donations are counted and so forth, let’s start by defining the giving limit. The IRS sets a limit on the percentage you can claim for a tax write-off. This is set at a maximum deduction of 50 percent of your adjusted gross income for the majority of contributions. It’s important to note that some contributions are set at a lower limit. For those technical people among us, that’s found on Line 36 of your IRS Form 1040.
The donation limit only applies to the contributions given in that specific tax year that you’re filing your taxes for. However, you can still claim a tax write-off for anything you give over that 50 percent limit. The remaining balance must be carried forward. You can carry the balance forward for up to five years according to the Internal Revenue Service.
How Is This Write-Off Processed On Your Tax Return?
Now, you should have a better idea of what the limit is for your charitable contributions. You’re probably now wondering how this write-off is actually processed on your tax return. The answer to this question isn’t too overwhelming. We’re going to easily walk you through it below.
You can donate various things. The most common is money or property. As long as you donate the money to a qualified organization, which we’ll get to later on in this informative article, you will put the write-off amount in Form 1040. You’ll also itemize the deduction on your Schedule A form. It’s very important to note that you can’t deduct your charitable contributions if you don’t choose to itemize your deductions.
What Are Qualified Organizations?
As you learned above, you need to be giving your property, money, or another type of donation to a qualified organization for the amount to be tax-deductible. Qualified organizations are defined as non-profit groups that are educational, scientific, literary in purpose, charitable, religious, and prevent cruelty to animals or children. To give you a better idea of the types of charitable organizations that are considered qualified by the Internal Revenue Service, we’re going to provide you with a few examples below.
- Mosques, Temples, Synagogues, Churches
- Federal, Local, and State Governments (As long as the contribution is public, not personal)
- Nonprofit Hospitals And Schools
- Recreation and Public Park Facilities
- Veterans Groups
- Goodwill, United Way, Girl Scouts, Boy Scouts, Red Cross, Salvation Army
If you’re not sure whether or not your specific charitable contribution qualifies for a tax write-off, you can simply contact the IRS and ask. They have an abundance of resources online that can help you to better determine qualified organizations. To give you a better idea of the types of organizations that don’t qualify, let’s take a quick look at a few different examples below.
- For-Profit Organizations
- Dues, Bills, Or Fees To Social Clubs
- Homeowners’ Association
- Political Groups Or Public Office Candidates
- Civic Leagues, Labor Unions, Chambers Of Commerce, Social Clubs, Sports Clubs
- Lawmaking Or Lobbying Organizations
- Bingo, Raffle Tickets, Or Lotteries
- Most Foreign Organizations (A few exceptions of Canadian, Mexican, and Israeli charities)
As you can see, any organizations that are for-profit don’t qualify for a tax write-off. In general, any organization that you donate to in the form of dues, gambling, or gaining something you want doesn’t tend to qualify for a tax write-off. Don’t be afraid to ask your tax professional if you’re unsure of whether or not a specific charitable donation qualifies for a tax deduction. Most individuals who are in charge of the non-profit charity are able to tell you whether or not their organization is considered ‘qualified’ by IRS standards.
Always Have A Paper Trail
While the IRS doesn’t actually look at everyone’s receipts and records of their charitable donations, they have the power to. If you notate specific tax write-offs and are chosen to be audited, you must provide proof of those charitable donations in order to maintain the deduction. Otherwise, your deduction won’t qualify on your tax return and you’ll end up owing the Internal Revenue Service money that you really shouldn’t.
When it comes to small cash donations of $250 or less, there’s not a lot of hassle with proof. You simply need a canceled check or a receipt from the charity. Either one will work as long as it includes the name of the charity, the amount you contributed, and the date the contribution was made. These are the simplest form of tax deductions to prove.
If you decide to contribute more than $250, you’re going to need to have written documentation of that donation from the charity itself. Most qualified charities are already familiar with this requirement and will naturally provide you with a written record upon your donation of $250 or more. Their receipt should include the charity’s name, the date, and the amount they gave. It should also specifically state whether or not you received anything of value as a result of your contribution to the charity.
Defined as donating anything that isn’t cash, property donations also require some form of documentation for the IRS. The records that you need will highly depend on the value of the actual property that you contributed to the charitable organization. Any property that is deemed to be valued at $250 or less should be notated with a receipt. This should show the charity’s name, the date of the contribution, the location the donation was received, and the description of the property donated.
When it comes to donations between $250 and $500, there is an additional requirement. Apart from having a written record of the property description, location, charity name, and date of the contribution, you also need to have the charity state whether or not you received services or goods for your contribution. This requirement is very similar to the one that is included in the cash donation written record.
Moving further up, donations that run between $500 and $5,000 require that you have documentation that shows how you got the property. You’ll also need to include the date that you acquired the property. This type of donation requires all the previous documentation requirements that the lower property donations stated above. When your donation is in this specified range, you’ll need to file Form 8283. This is called the Noncash Charitable Contributions Form.
When it comes to any charitable donation to a qualified charity over $5,000, you’ll also need to have a qualified professional do a written appraisal of the property. This appraisal must be submitted alongside your usual tax return and Form 8283. All other previous requirements in this property donations section are also required for this larger level of donation.
Since way back in 2005, vehicle donations are handled in a very unique fashion. You can only notate the tax deduction of the value the charity sells the vehicle for. So, if you intend on getting rid of a vehicle, you can actually donate it to a qualified organization. When they sell the vehicle, they get the money and you get to write off that specific sale price on your tax return up to the annual allotted limitations set by the Federal Government.
Can I Deduct Contributions I Received Something For?
Sometimes you may make a contribution to a qualified charitable organization and actually receive something in return from it. Although you may be unsure, it’s true that you may be able to get a deduction for your taxes. It’s important to note that the value you receive on your tax return is going to be limited to the amount that is equal to the value of what you gave minus what you received.
So, if you donated property worth $200 and received a service worth $100, the limit of your tax deduction would be $100. Or, let’s say you gave $100 to a charity dinner. The dinner itself was worth $30. You can claim up to $70 for your tax deduction. If you find yourself receiving goods or services after making a contribution of more than $75, the charity is responsible for giving you a written statement of the value of the goods or services that you received. This way, you can properly figure out your tax deduction limit.
Can My Business Write Off Charitable Contributions?
Since you have a fairly decent idea of how tax deductions work for charitable donations, let’s move onto considering charitable tax deductions for businesses. It’s important to start out by noting that the entity’s business classification will determine whether or not tax deductions are possible for charitable organizations.
There are five main types of business entity types. These include the following:
The only entity type that will be capable of reporting qualified charitable donations on its tax return is the c corporation. All other entity types will require the tax write-off to be recorded as a personal charitable deduction on the owner’s or member’s individual tax return. If you’re familiar with these other types of business entities, you’ll note that profits and losses are recorded on the individual’s tax return. So, it’s not really a big shock that charitable contributions are recorded on a personal level as well for these types of businesses.
When it comes to companies with various members or partners, it can seem a bit confusing at first how you would handle the donation. What you want to do is simply split up the donation value or amount evenly among the business owners or members. So, let’s say your LLC has four members and your business donates a total of $4,000 through the year. Each LLC member will notate a $1,000 charitable donation on Schedule A.
As you learned above, you would have to itemize your deductions in order to take advantage of the tax write off. This begs the question of what happens to the write of the amount if a member chooses not to itemize their deduction. The answer is that nothing happens to it. No other member can claim the deduction even if another member doesn’t itemize the deduction on their individual tax return.
Does Donating Business Services Count?
Your business may offer services to your local community. If you decide to donate some of your services to a qualified charitable donation, don’t expect to use it as a tax write-off. The Internal Revenue Service doesn’t allow services or volunteering time to be written off as a tax break for any business.
One way you can get some deductions out of the time that you volunteered or the services that you rendered is by deducting the value of the expenses you incurred. These expenses must be things that you incurred while donating the service to a qualified organization. This could be the gas you spend traveling from location to location donating your time or something similar. Just make sure that you keep your receipts so that you have them when the Internal Revenue Service asks for them during an audit.
Understanding charitable contributions and how they affect your tax write-offs can seem overwhelming at first. Hopefully, you now have a much better idea of how this process works. You should’ve learned how to identify a qualified organization, what forms you need to fill out to make your donation official with the Internal Revenue Service, what contributions qualify for deductions, and up to what amount you can donate.
The Internal Revenue Service is very specific in its determination of the types of contributions you can deduct and how to do so. Any knowledgeable tax professional can help you to determine what qualifies as a deduction. Or, you can look online at IRS.gov to learn more about charitable contributions and how they affect your tax return or the tax return of your business