Should I Donate to Charity Personally or Through My Business?

501c3 business deduction business expense deductions business expenses charitable contributions charitable donations charitable giving charity donations itemized deductions tax deduction Jul 22, 2022

As a business owner, you likely want to find ways to give back to the community that has supported you. One of the most popular ways to do this is by making charitable donations. But before you start writing checks, there are a few things you should know about deducting charitable donations and which makes the most sense.

First, charitable donations are generally not deductible as business expenses. A business may choose to donate, but the donation would be taken on the owner(s)'s personal tax return under itemized deductions.

There are two reasons why donating from the business account may not be a good idea:

  1. If your business is taxed as a partnership or corporation (including S Corps), donating from your business account is treated like an owner's distribution, and this lowers your basis in the corporation. If you withdraw over your basis, you end up actually paying more tax on those distributions.
  2. We currently have a Qualified Business Income (QBI) deduction, which allows you to deduct 20% of your net profit as a qualified trade or business. Think of this as a 20% head start in reducing your profit before you are taxed. Why does this matter? Because you will want to add back in that charitable contribution so that it goes toward the total profit used to compute QBI.

If you wish to provide funds from your business for a charitable organization, there is another way. If you receive something in return for your donation, such as advertising, then this is a business expense. If you sponsor your local Lions club event and they include your logo on their print materials, then this is simply an advertising expense. It is not considered a "donation" per se, because you actually purchased something of benefit to the business.

If you plan to donate and do not expect any benefit in return, make the donation from your personal bank account. Make sure to save the receipt for tax time and get documentation that the organization is a 501c3 charity. Else, the donation may be disallowed. If you wish to donate from the business, however, you will only get the business expense deduction if you purchase something of benefit to your business.

Knowing this, you can strategically plan how to give back to charities while also lowering your tax liability at the same time.