Most people know that donations to charitable organizations can help lower your taxes. But there are 3 tax deductible charitable small business donations that you may not know about.
As we come to the close of another year, this might be a great time to look around your business and see if you can take advantage of some tax savings hiding in plain sight. We think you might be surprised!
Charitable Small Business Donations You Might Not Know Were Tax Deductible
Do you have a company vehicle (or two or three) that you no longer need? If so, it could be a tax deduction that you didn’t know about.
You might be in the process of upgrading your fleet, or maybe the vehicle you have has seen better days. Either way, by donating it to a qualified charitable organization instead of selling it or trading it in, you could do some good in your community and realize some savings on your taxes at the same time.
In order to properly donate a car, truck, or another type of vehicle, you must first determine its Fair Market Value (FMV). It’s important to note that the qualified 501(c)(3) organization to which you are donating the vehicle cannot assign FMV. The IRS sees that as a big conflict of interest. Therefore, the person donating the vehicle must be the one to determine what it is worth.
The easiest way to do that is to use a company like Kelley Blue Book (KBB). Their online valuation tool allows you to get very specific when it comes to the features and condition of the vehicle you are donating.
Their 27-point vehicle quiz is basically a complete walk-around examination of your car or truck, so it is much more accurate than comparing it to just like any other make and model with the same year and mileage. You can get more detailed instructions from KBB in their article, “Kelley Blue Book Provides Most Accurate Vehicle Values for Tax Filing.”
Charity Navigator also has a good “Guide to Donating Your Car” that you should read for more information if you think this might be a good way for your business to lower your tax burden this year.
A couple of things to keep in mind when donating a vehicle to a charitable organization, though:
- Use “Private Party Value” to decide what it is worth. Sites like KBB allow you to see values based on whether or not you are trading your vehicle to a dealer or selling it privately. For tax purposes, always go with the “private party” value. (Note: If it is worth more than $5000, you must have it appraised by an independent vehicle appraiser and fill out Section B of IRS Form 8283.)
- Be sure to properly transfer the title. Be wary of a charity that tells you to simply leave the ownership section of the title blank. If the vehicle isn’t properly transferred to them, any fines or crime associated with that vehicle will be your responsibility.
- Keep a good record of the donation. Non-cash donations often trigger audits from the IRS. When you donate a vehicle to charity, keep a printed copy of the valuation information, photo of the vehicle, and the receipt that you receive from the organization…just in case.
Most of the time when someone says “art,” we imagine a painting or something similar hanging in a frame on the wall. If you don’t have a valuable painting in the lobby of your company office, you might be tempted to skip over this section. But if you’re looking for a way to make a good tax deductible charitable small business donation, it could be worth your time to keep reading.
Art, according to the IRS information on charitable tax deductions, consists of “paintings, sculptures, watercolors, prints, drawings, ceramics, antiques, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects.” That’s a fairly wide range of items, and could it be that you have something that fits one of those categories?
Just like the vehicles we mentioned above, what you can reasonably deduct for donating art to a qualified charity is determined by Fair Market Value. The IRS defines FMV as “the price a willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell.”
Artbusiness.com says, “The price that similar works of art might sell for at auction is generally accepted to be a reasonable estimate or approximation of fair market value (or perhaps somewhat lower)… Another good estimate of FMV is the price that a retail gallery might pay for a similar work of art before they mark it up (or perhaps somewhat higher). This “dealer price” is considered to be the wholesale value of the art, and is generally considered a reasonable indicator of a work of art’s fair market value.” For more information, read the rest of their article on “How to Evaluate an Art Appraisal.”
If you’re in possession of art that you think may have some value, you could have it appraised and consider donating it to a charity. They could turn around and sell it (raising needed funds for their organization), and you could realize a significant tax deduction.
(Note: The IRS has pretty detailed requirements concerning appraisers and the appraisal process. Consult your tax professional to make sure you get the best information.)
Perhaps you’ve read the first two and thought, “those don’t apply to me…I don’t have any company vehicles, and I don’t have any valuable art.” Then this last potential tax deduction may be for you.
Businesses with excess inventory may donate it to qualified charitable organizations and receive a tax deduction for it. “Inventory” can be just about anything your company owns (other than money). It can also include intangible items such as patents, trademarks, and other intellectual property.
You can clear out some of your extra products, supplies, or materials, free up space in your office. Do some good in your community, and lower your taxes all at the same time!
There are limits that the IRS puts on your generosity, however.
- Donations cannot exceed 10% of your company’s taxable income.
- Food donations normally cannot exceed 15% of your taxable income. But under the CARES Act, food donations made in 2020 are deductible up to 25%.
Check With a Good CPA To Save the Most
To say taxes can be complicated is an understatement! The laws that apply to charitable small business donations can get especially confusing, and they change frequently. Avoid getting lost in the weeds and missing out on good tax savings by partnering with a good team of tax experts.
Be sure to check out our post on “How to Save Time and Money on Your Taxes This Year” to get you started!
At CRS CPA, we’ve been helping small businesses maximize their tax deductions for over 40 years! We believe you deserve to keep as much of your hard-earned money as possible. Our tax professionals have seen just about every situation imaginable, and we’re ready to help you, too.
Schedule a call today to see what hidden tax savings we can uncover for you!