Small Business Guide to Charitable Giving and Tax Deductions

Benefits of donating to a charity

Businesses experience a multitude of benefits when they donate to charities. Here are a few upsides of routinely donating to nonprofits and worthy causes. 

1. Charitable giving helps you connect with your community.

Charitable giving is good PR and makes sense for small businesses — especially those that depend on community involvement.

“What distinguishes small business from large-scale corporations is the connection with the community,” explained Kristen Fusaro-Pizzo, a Peer Collaborative Teacher at Staten Island Technical HS. “People want to … shop at a small business because a small business cares about them as individuals and the causes they care about.”

Charitable giving demonstrates small business community involvement and shows that you are in business for more than profit. As a small business, you may not get as large a tax deduction as big corporations and enterprises, but that doesn’t mean you should overlook the other benefits of philanthropy.

“As a single-store retailer, it is important for us to give back to the community,” noted Brad Schweig, vice president of operations for Sunnyland Furniture. “There isn’t really any tax benefit for us, so it comes back to being a part of our community. We do think it helps us from a marketing standpoint, as we want people to know that we are local, our team is local, and we support making our local community a better place.”

2. Charitable giving helps you build your network.

Charitable giving helps you build alliances with other organizations and network with potential partners. Donating to a local organization can be the start of long-lasting relationships and broader professional networks. 

“Develop an ongoing relationship with the charities you support,” advised Kris Putnam-Walkerly, a strategic advisor to philanthropists and foundation CEOs. “Don’t limit giving to the end of the year. Talk to the nonprofit about ways you could help year-round, such as volunteering, sponsoring events and inviting the charity’s CEO to speak to your local business associations. And remember, this is a two-way relationship. Ask the charity if there are easy ways they could publicize your support, such as in their donor newsletters.”

3. Charitable giving has intangible benefits.

Charitable giving can bring intangible benefits to a workplace, including the following. 

• Improved company culture: Working with charitable organizations can improve company morale and show current and future employees that your company culture is thoughtful and focused on a broader worldview. 
• Improved brand image: Giving back to the community and the world demonstrates corporate social responsibility, which can improve your brand image and lead to a more loyal customer base. 

Ways to donate to charity

Monetary donations are not the only way to support charitable causes. Consider the following ways to support charitable organizations:

• Volunteer. Companies can donate their time to a great cause. Consider volunteering as a company at a food bank, charity run or homeless shelter. You can also encourage employees to volunteer in ways that involve their unique talents and skills.
• Sponsor a sports team. Youth organizations are always looking for businesses to sponsor their teams. Donate funds towards field upkeep and uniforms. Companies that sponsor teams can have their names displayed on uniforms or field signs.
• Launch a charity drive. Start a collection for a particular cause, such as collecting nonperishable food items for distribution at food banks or organizing a holiday toy drive.
• Donate online. Set up automatic donations through virtual giving platforms. You could even leave a collection jar or online portal at your place of business.

How to make charitable tax deductions

Charitable donations can significantly affect small business taxes by creating tax deductions. For your donation to qualify for a tax deduction, your chosen charity must be a bona fide 501(c) (3) organization. Use the IRS search tool to confirm the group is registered. You can search by state, which helps you quickly find your charity of choice.

When it comes to sole proprietorship taxes, you can deduct qualified charitable contributions in one of two ways.

• Business tax deduction: You may qualify to take a business tax deduction on your Schedule C if you can show you expect to receive a business benefit from the contributions — for example, if you sponsor a local sports team to build community goodwill. You generally receive a greater tax benefit by taking a business tax deduction than by taking an itemized deduction.
• Itemized deduction: As a sole proprietor, charitable contributions for which you cannot expect a benefit to your business are deducted on Schedule A with your other itemized deductions.

It’s important to note that the Tax Cuts and Jobs Act of 2017 made it harder to claim itemized tax deductions, including charitable giving, by raising the standard deduction for individuals. However, there are ways to get around this change, including using a donor-advised fund. A donor-advised fund allows you to donate enough money upfront in one year to become eligible for tax deductions, while the donor-advised fund holds the money. You can then distribute the money from the fund over several years if you want to make more regular donations. 

Sounds complicated? It can be if you’re unfamiliar with the regulations. Consult with financial experts for advice on how to make significant charitable contributions that could have far-reaching tax ramifications. 

“As far as looking for advice somewhere, I honestly believe [small business owners] should be talking to their tax advisor,” cautioned Kathleen Adams, CFP and co-founder of Second 50 Financial. “It’s too complicated right now. People have a lot of misconceptions. They come to me all the time with things they’ve read on the internet. This isn’t the year to do that.”

Charitable deduction basics

Learning a few fundamental elements of charitable deductions is essential. 

The following three types of charitable gifts can be deducted:

• Cash: Cash contributions are straightforward and should be easy to track if you use a trackable payment method or keep receipts. You can’t take a deduction for actual cash donated without a receipt.
• Gifts of property or equipment: For gifts of property or equipment, your deduction depends on how much you donate. If you give cash or property to a charitable organization that exceeds a $250 value, you need the organization to recognize your gift in writing for tax purposes. A noncash charitable deduction of $500 or more requires you to complete IRS form 8283. 
• Travel expenses: The 2023 IRS standard mileage rate for charitable giving remains at 14 cents, meaning you can deduct 14 cents per mile when you travel to help a charitable organization. That’s not a big deduction, but it’s worth tracking and deducting. Keep gas receipts and track mileage to better estimate the money you’ve spent traveling for charitable giving. 

Note that you don’t have to report donations to nonprofits on a 1099 form. 

More on charitable cash donations

The IRS generally limits the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction to 60 percent of adjusted gross income (AGI). However, this limitation has temporarily been lifted. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income for 2023. Contributions that exceed that amount can carry over to the next tax year.

The temporary 100 percent rule applies to four different types of charitable organizations:

• Public charities
• Private operating foundations
• Private foundations that distribute donations to private operating foundations and public charities within 2.5 months from when the contributions are received
• Private foundations that pool contributions and eventually pay them to public charities

Charitable donations that aren’t tax-deductible

Certain charitable donations are not tax-deductible, including the following:

• Political donations
• Gifts to individuals
• Gifts to for-profit schools

Decide how much your business should give to charity

Donating to local organizations is worthwhile, but you must also consider your business’s interests. Don’t donate an amount that will sink your company. Be smart as well as charitable. Although you may receive a tax benefit, the tax benefit is always less than the contribution amount.

Adams stressed the importance of considering your personal and business cash flow when making a charitable donation.

“If you are going to donate $1,000, and let’s say you get a $330 tax savings, you’re still giving the other $670 away,” Adams explained. “Business and personal cash flow, in my mind, has to be first. They can’t compromise [cash flow] even though they may want to give to charity.”

How to choose the right charity

When you donate money, ensure it’s put to good use. Look for fiscally responsible charities aligned with your company values and workplace ethics. Be especially careful to avoid charity scams.

1. Find charities that support your values.

Fusaro-Pizzo suggests choosing organizations that align with your brand. For example, environmentally conscious companies may want to help organizations that advocate for clean water or ocean life.

National charities that align with your company’s values are always an option. But for a small business tied to the community, choosing a local group often makes sense. “We try to focus on smaller local groups versus nationwide organizations since these are the ones that the bigger companies seem to miss,” Schweig noted.

If you find two or three organizations that fit your business’s values, supporting multiple charities is a good idea. You’ll involve your business deeply in your community and build strong relationships with charitable organizations.

2. Research the efficiency of charitable organizations.

You want to give to a charity that handles money responsibly. 

“Do your homework,” cautioned Putnam-Walkerly. “Just because an organization is well known doesn’t mean it’s well run. There are many websites that provide a tremendous amount of information about nonprofits, such as GuideStar, Charity Navigator and the Better Business Bureau Wise Giving Alliance.”

Don’t hesitate to contact the charity to ensure it’s a good fit. “You can also pick up the phone, call the organization and ask to speak to the executive director,” Putnam-Walkerly advised. “Nonprofit leaders should be happy to talk with potential donors about their organization and their impact and should be especially interested in building relationships with local businesses.”

Additionally, run an internet search on the charity to confirm it hasn’t received recent negative press about scandals or misusing funds.

3. Take security precautions before donating.

Online scammers too often take advantage of people’s generosity. Consider the following scams and how to protect your business.

• Gift card scams: Adrien Gendre, chief tech and product officer at Vade Secure, believes businesses or individuals that donate to charity via gift card are at risk of being scammed. In one current scam, people and businesses are asked to purchase gift cards from nearby stores and provide the codes to scammers posing as charities. Avoid donations like this, where almost nothing can be tracked.
• Website and email scams: Beware of well-designed website and email scams. If you receive an email soliciting donations that appears to be from a legitimate source, double-check the sender’s email address and accompanying website to ensure you’re not being duped by a minor change to the URL. “Go on Google, type the brand, find the website from Google, and compare the URL,” Gendre advised. “That’s the easiest trick.” 
• Timed scams: Some scams are highly complex. For example, some scammers select specific days and times to send phishing emails based on when people’s inboxes are busiest. Don’t fall into a trap because you’re in a hurry on a busy day.
• High-pressure scams: According to Gendre, the number-one charitable scam red flag is someone trying to rush you into donating. If you’re being pressured to donate over email or phone, step back and question the organization’s legitimacy. It’s safer if you contact them rather than the other way around.

Keep the charity informed

Consider the following tips to maintain a positive relationship with a charitable organization: 

• Share PR plans with the charity. Keep your chosen charity informed of any PR plans related to your contribution. Most organizations have a business outreach individual you can contact and coordinate with for your donation and any resulting PR. 
• Get permission to use the charity’s branding. You need a charity’s permission to use its branding in any press releases or announcements you make to customers.
• Get the charity’s written acknowledgment. Contributions and gifts that exceed a specific monetary threshold may require a written acknowledgment from the charitable organization for tax purposes.

Charitable giving benefits good causes and your business

Many entrepreneurs are motivated to be successful in part so they can turn around and help others. If you receive public relations and tax benefits when you help charitable organizations, you can manage your business, pay yourself and your employees, and continue to support worthy causes. When you understand small business giving and avoiding pitfalls and scams, you can continue the cycle of prosperity as your business grows. 

Sally Herigstad contributed to this article. Source interviews were conducted for a previous version of this article.