Ask the Tax Pro: Can I deduct Charitable Contributions for My Business?

Posted on 25. Mar, 2010 by Stefani in Ask the Tax Pro, Tax

The below question was asked by a taxpayer:

I’m the sole member of an LLC, can I take a charitable deduction on my business return for cash and services I provide to my church?

I get this question quite often.  And like most things involving tax, the answer is yes and no.   Charitable contributions of cash are deductible, but not on your Schedule C.  Instead, they’re deductible on your Form 1040, Schedule A.  This isn’t simply due to the fact that you’re an LLC.  In fact, the only business entity that can deduct charitable contributions on their tax return is a C corporation.  Every other entity, whether it’s an S Corporation, an LLC, or a partnership, has the amount contributed “flow through” to each member’s personal return.

I should add that most business owners confuse advertising expenses with charitable contributions of cash. Oftentimes, a business owner may “donate” cash to a local church or other charitable organization and, in turn, the business will get an ad placed on the organization’s website or in pamphlets.  In this event, just because the organization is a charity doesn’t mean that payments to them automatically get classified as a donation. Actually, as long as (a) the payment is for an expense that is directly related to a taxpayers business and (b) there is a reasonable expectation of financial return commensurate with the payment or transfer, then it can be deducted under Code Sec. 162—just like other normal business expenses—since this would actually be considered a valid business expense and not a charitable contribution since your business received something in return for your donation: advertising.

Please note that if you have a charitable contribution and a business deduction within the same transaction, no part of the payment can be deducted as a business expense.  As an example, if you donate $500 to a religious organization, and you then receive ad space on their website that they would normally sell for $200, that $200 could not be deducted on the business return as advertising. Your charitable contribution deduction would be limited to the $300—the amount that exceeded the value of the services or products you were provided. And that amount, unless the business is a regular corporation, would be deducted on Form 1040, Schedule A.

However, if instead of one transaction, you had two separate transactions, one for a valid donation of $300 and the other for advertising of $200, then each would be deducted as they would normally—as a charitable contribution and a business expense, respectively.

The last thing I want to make clear is that donations of time or services are never deductible.  This is true even if you can easily value the time or services you provide. If I had a dime for every time I got asked this question…

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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