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Bookkeeping Tips and More for Small Business Charitable Donations

You’ve got your bookkeeping down to a science when it comes to accounting for small business. But how about accounting for charitable donations?

Small businesses already support their communities by providing employment for more than half of US workers. Did you know that those small business owners take it a step further with 75% making charitable donations annually?

Here are some things to keep in mind as you consider making donations to charity…

More than bookkeeping benefits

The most obvious reason for making charitable contributions is because you want to help. You can feel good about making a difference in your community.

Your business may experience other benefits as well…

Goodwill

If you have a reputation for supporting local organizations, customers may be more likely to make a point of frequenting your business.

For example, Latte Da Coffee Shop collects school supplies from customers, purchases backpacks, and delivers it all to the local elementary school every fall. Customers are encouraged to choose Latte Da for their morning coffee because Latte Da is known to be a supporter of their school. (One study says that donating businesses are favored by 89% of consumers.)

Employee morale

As a small business owner, you may not have deep pockets and are already strapped for time. On the other hand, you need dedicated employees. One way to attract and keep workers is by doing what you can to support a cause.

Socially responsible workers like their employer to support causes that they care about. In fact, a survey of millenials (born after 1980) states that 83% want businesses to actively work to solve social problems. There are ways for you to get involved without breaking the bank or totally giving up sleep! … see below.

Publicity

Perhaps you prefer to make a quiet monetary donation. On the other hand, perhaps your small business charitable donation requires a more visible presence at a community event. In the latter case, your business might get some publicity! After an event, you can post pictures online, or maybe the local newspaper will publish a story. Either way, you are getting free publicity for your business.

For example, Violet’s Veterinary Hospital hosts an annual “Pet Portraits with Santa” event that includes local crafters with pet-related products. All proceeds from the photos go to the local animal shelter. Dr. Violet’s social media advertising before the event brings in both the crafters and pet owners. The online posts and newspaper story following the event make Dr. Violet’s clinic known to the community. Customers are more likely to choose the veterinarian who provides support to the community.

Tax deductions

Here’s where the small business bookkeeping comes in! The expense of making a donation may be partially offset by the benefit of the tax write-off. The IRS is very particular about the validity of the charity and your receipts, so your accounting for charitable donations needs to remain organized. Do your research before making that donation. What you give, and who you give it to, can determine whether your generosity is a small business tax deduction or not.

What can you give?

You can simply write a check and mail it to your favorite cause. Or you can get creative with your donations (just remember to find out if your innovative idea will be tax deductible).

Depending on the product or service that you sell, one of these options may work for you:

Cash or check

Sometimes the organization can stretch your dollars by purchasing needed items at a deep discount. For example, food banks often state how many meals they can provide for five dollars.

In kind

Instead of cash, an in-kind contribution is either goods or services that you would provide to the charity. For example, Pete’s Pizza Shop might deliver free pizzas to a nonprofit’s monthly board meetings.

Donate property

Just about anything can be donated for either the use of, or sale by, a nonprofit! For example, Twinsville Tax Preparation is having growing pains in their current office and decide to update their furniture and electronics in their spiffy new offices. Mr. Twinsville could donate the old desks and computers to a nonprofit small business incubator.

For bookkeeping purposes, see IRS Publication 561 (Determining the Value of Donated Property) when deciding the dollar value of your donation.

Volunteer program

According to the Bureau of Labor Statistics, almost 63 million Americans volunteered in 2014; thousands of those volunteered through their workplace. Junior Achievement, a worldwide employee volunteer program (EVP), notes the positive impact on employee attitude and job satisfaction from EVPs.

Your EVP will depend on the interests of your employees and finding a good fit for your specific business. For example, Glamour Hair Salon offers a free cut and style each quarter to the residents of a local women’s shelter. Ms. Glamour pays her stylists their normal hourly rate during these volunteer sessions.

Choosing a charity

You have literally thousands of organizations from which to choose. There are 415,000 nonprofit organizations with 501(3)(c) status (IRS, 2012). Donations to a nonprofit with 501(3)(c) status will be tax deductible. The important thing is to find a cause that is a good fit for your business.

Who do your employees already support? You could partner with that nonprofit that your employees care about. Your offering can vary from time to cash to in-kind donations.

For example, your employees may be involved with the neighborhood school. Let’s say you own a diner. Your diner could host a school fundraiser where a percentage of the receipts is donated to the school.

Do you have something the charity needs? Rather than supporting one organization on a continuing basis, maybe you prefer to watch for opportunities and help when you can.

Did the charity choose you? Does your shop receive a stream of donation requests for freebies or gift cards? You can’t afford to say yes to everyone! Before you say yes, consider whether the donation will be tax deductible, how important this organization is to you, and if the donation is an opportunity for free publicity.

The IRS has a handy search feature for up-to-date information on organizations that are eligible for tax-deductible contributions.

Watch out for scams! The Federal Trade Commission (FTC) has a helpful checklist for charitable donations in general as well as information about scams. You want your donations to go to the people who need the help. The FTC lists useful websites for researching possible scams.

Signs of a possible scam include offering thanks for a previous pledge you don’t remember making, pressuring you to give ASAP, avoiding discussion of a receipt, and using a similar name to a legitimate charity (e.g., “Grant” a Wish instead of Make a Wish).

One caution about tax exemption. Donations to public entities like schools, fire departments, and police are generally tax deductible. There are also fraternal organizations, unions, etc., that may be tax exempt. However, donations to these tax exempt organizations may not be tax deductible. Just because an organization is tax exempt, that does not necessarily mean your donation is tax deductible.

Bookkeeping tips for small business charitable donations

The IRS offers a comprehensive guide called Publication 526, Charitable Contributions which contains links to all the publications and IRS forms you will need to do your accounting for charitable donations. You will also want to consult with your tax professional.

Here are a few tips to keep in mind:

  • First and foremost, your bookkeeping system needs to include tracking of all contributions. The type of documentation will depend on the type of contribution (e.g., cash, noncash, out-of-pocket expenses for services donated, payroll deductions).
  • Charitable deductions are reported on Schedule A (Form 1040).
  • Follow IRS guidelines when setting the value of your noncash contribution.
  • Noncash contributions may require an extra form (IRS form 8283).
  • When it’s time to file your taxes, your tax structure will determine how the tax deduction will be handled (e.g., sole proprietor, partner, corporation).
  • Please note that donations to an individual are never deductible. For example, Cal’s Clothing donates some clothes from inventory to a local family that lost their home in a fire. That donation will not be tax deductible. (Cal might decide to make the donation anyway!)

Small business owners are known to be philanthropic and are important to the success of any community. You deserve congratulations and thanks for all you do!

Any easy way to track your charitable contributions is with our business accounting software. You can check it out with a free trial.

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