How To Keep Tax Deductions Straight

I get a lot of questions about tax deductibility surrounding donations and events. There’s specifically a lot of confusion around businesses donating vs individuals. It’s certainly not straightforward and so I thought I’d break it out briefly although I recommended talking to a tax attorney for ‘legitimate’ advice. =)

Individuals: An individual can only deduct donations, which means that the donor is not receiving anything of value for their money. If the donor is receiving something of value, then they can’t deduct that for tax purposes because they are basically buying something. When you get your receipt from the nonprofit for the donation, it ‘should’ break this out for you showing you what value you received and what portion was a straight donation. You can only deduct the straight donation.

Example: If we want to donate $5,000, but the value we receive at the gala (via food, entertainment, etc) is $500, then we can only deduct $4,500 for taxes. In fact, for us, we write two separate checks out of two separate bank accounts to keep it straight. We would write a check for $4,500 out of Notley Fund (our 501c3), and $500 personally (non-deductible portion).

Businesses: A business has it a bit easier and more options but it’s often more confusing. A business is often better off classifying a check to a nonprofit as a business expense (marketing, branding, advertising, team builder, professional development, etc). Businesses have limits on how much they can deduct for charitable contributions and often no limits on how much they can deduct for standard businesses expenses. A business does NOT pay tax for any income that is ultimately spent on legitimate business expenses.

Example: If BuildASign wants to buy a table for $5,000 and send 10 staff to a charity event, it ‘could’ write off some of that as a charitable donation, but it might be easier to write it off as a professional development expense, a team builder expense or some other non-charitable business expense.

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Dan Graham