Can you really claim a charitable donation as a business expense instead of as a charitable contribution?
With a little creative tax planning, the answer is yes.
If you fall into one of the following scenarios then, then this strategy will be advantageous to you:
a) You claim the standard deduction, or
b) You are subject to self employment tax, or
c) You are subject to phaseouts of your charitable deductions, for example a C corporation can only deduct 10% of its taxable income as charitable donations
By showing your charitable contribution has a direct relationship to your business and you made the payment with a reasonable expectation of financially benefiting, the payment can be considered a business deduction instead of a charitable deduction. As a result, you can deduct the payment like any other business expense.
How can you put this strategy to use?
Here is how we helped one of our clients take advantage of this strategy. Our client runs an insurance agency through a S corporation. Our client doesn’t claim itemized deductions on his personal tax return. Although our client doesn’t itemize, he wants to give away 6% of his insurance commissions to charity.
Realizing our client wasn’t taking a tax benefit for his charitable giving, we advised our client to team up with a local charity that focused on improving the local community. We had our client create a promotional relationship with the charity that included having the charity:
a) advertise the relationship with our clients insurance firm
b) advertise the fact that doing business with our clients insurance firm would lead to money flowing back into the community
As a result of this relationship, our client was now able to claim the charitable giving as a business expense because:
a) his firm was located in the community;
b) he made payments to a charity that promoted his local insurance firm;
c) he made the payments with the intention of separating his insurance firm from other insurance agencies located in the neighborhood; and
d) our client had a reasonable expectation that this relationship with the charity would help direct new clients and retain existing clients
There are many other techniques our client could have used to accomplish this strategy as well.
At Gedeon Law & CPA, not only are we always looking to help our clients use the tax law in their favor but sometimes we can help our clients realize their philanthropic pursuits too.