Ready or not – it’s tax time again! We’ve done two blogs for small business tax filing, one about the IRS’s Section 179 Deduction and one about cost segregation for landlords; this week we want to make sure you know about claiming charitable donations.
Contributing to a worthwhile charity is an opportunity to do a good deed, get some networking in, and, yes, get tax deduction benefits. So if you made charitable donations in 2016, here’s what you need to know.
Keep Good Records
We say this in every blog about taxes, and it’s no less true when it comes to claiming charitable donations. If you file your own tax returns, keeping good records all year eases the burden of filling out your paperwork; if someone else files your taxes, good paperwork ensures that no charitable donations are overlooked and not submitted to the IRS.
And, even more importantly, good records mean that you can back up your deduction claims if the IRS decides to audit you. Supporting documentation for your donation includes canceled checks, bank or credit card statements, and written receipts from the organization receiving the donation.
Choose an Eligible Charity
The IRS defines a charity as an organization “operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.”
This includes, but is not limited to:
- Churches
- Nonprofit organizations such as volunteer fire companies
- Foundations such as the Wounded Warrior Project
- Trust funds
- Any other organization that matches the above criteria, such as St. Jude’s Children’s Research Hospital or the ASPCA.
Most charities operate as federally approved 501(c)(3) organizations; you can search for eligible charities with this IRS search tool.
Know the Rules
Tax laws are complex, so it’s important to note that the IRS doesn’t consider all contributions eligible for deductions.
Eligible contributions include, but are not limited to:
- Money – Cash or other monetary contributions are typically tax deductible as long as they’re not set aside for use by an individual.
- Property – Donations are evaluated based on their fair market value, which is how much a customer would pay for the goods in an open market.
- Volunteer services – You can’t deduct the value of your services, but you can deduct expenses related to your volunteer work, such as the cost of supplies – stationery for invitations for a fundraising event, for example, or water for participants in a 5k.
Caveats apply, of course (it’s the IRS, after all!):
If you received goods or services in return for a donation, such as free advertising, the IRS reduces your deduction by the cost of the benefit you received.- Donations must be made during the tax year to be eligible.
- You’ll need the very specific Form 1040, Schedule A to itemize each deduction before filing your claim.
- Deductions are limited to 50% of your adjusted gross income, but 20% and 30% limitations sometimes apply.
As you can see, the IRS likes to keep your tax refund as small as possible, so when in doubt, contact a CPA to help you with claiming charitable donations. There are also references available online, including this official IRS guide.
For a CPA recommendation to handle your charitable donation deductions for tax time, or for other money matters, please contact Holdfast Wealth. And don’t forget – you have extra time to get your taxes filed this year; due to several factors, your tax returns aren’t due until April 18th!
