Should Your Business Give Cash or Assets to a Charity?

How Cash and Asset Donations Work for Businesses

Woman puts clothes into box to donate to charity
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If you’re thinking about ways to cut your business taxes at the end of the calendar year, donating assets or cash to charity may be one way to do just that. Here’s how to deduct charitable donations of different types, based on your business type and the type of donation.   

Key Takeaways

  • Corporations may donate directly to charitable organizations; small business owners may take these deductions through their individual tax returns.
  • Small business owners must be able to itemize deductions on Schedule A to deduct donations of cash or property. 
  • Before you donate property, you’ll need to find its fair market value. 
  • To be able to take a tax deduction, you must get a letter from the charity acknowledging the donation.

What To Consider Before Your Business Donates to Charity

If you are wondering what type of tax break your donation will bring your business, there are some things you need to know about how different kinds of businesses can donate to charities. 

If your business is a corporation, the business can take a tax deduction for any donations, whether they are assets, cash, or investments. The deduction is considered a business expense on the corporation’s tax return. 

If your business is not a corporation—and you’re a sole proprietor, partner in a partnership, or an S corp—you can't take a deduction for a donation on your business tax form. Instead, you can claim the deduction via your personal tax return (Form 1040) and you must itemize, using Schedule A. This deduction will reduce your personal income, not your business income.

Note

To get a tax deduction for a charitable contribution, you must donate to an IRS-approved charity. The IRS offers the Tax Exempt Organization Search tool where you can see the complete list of approved charities.

Valuing Assets for Donations

The Internal Revenue Service (IRS) allows two types of donations: cash and noncash, sometimes called “in-kind” donations. Donating cash is pretty straightforward, but donating property and assets is a little more complex. To donate property, you must first find its fair market value (FMV), to see if it has increased or decreased in value since you bought it for your business.  

If the property has increased in value, you may have to reduce the fair market value by the amount of the increase in order to figure your deduction. For example, if you bought a generator for $1,000, and its current FMV is $1,500, you may only be able to take a deduction for the $1,000. 

If you donate property that has decreased in value, your deduction is limited to the fair market value of the item at the time of the donation.

Note

Be sure to keep accurate and complete records on business assets so you can substantiate the original value (called “asset basis”). Include costs of buying the item, shipping it, setting it up, and training on its use.

Special Rules for Donating Specific Assets

There are special ways to value different types of business property.

Capital Assets 

Capital assets are long-term business property owned for investment purposes, including real property (land and buildings). They are subject to capital gains or losses, a different tax status than ordinary gains or losses. To set the value of capital assets you may be able to use the fair market value. But in some cases, you may need to reduce the fair market value by the amount of any capital gain if you sold the property.  

Note

Any noncash contributions of capital gain property are generally limited to 30% of adjusted gross income (AGI) for individual taxpayers.  

Inventory 

If you're donating inventory (property your business sells), you can deduct either fair market value on the day you made the donation or its basis, whichever is smaller. The basis is any cost from a previous year that you would include in your opening inventory for the year you make the contribution. You can’t include your contribution in your opening inventory. 

Note

The IRS has special rules for donating “apparently wholesome” food inventory to a charity. If all seven conditions are met, you can use a worksheet—part of Publication 526—to figure out the deduction.

Intellectual Property

Intellectual property includes intangible assets like copyrights, patents, and trademarks. If you donate any of these, use the basis (original cost) of the property or the fair market value, whichever is smaller. You may also be able to take an additional deduction in the year of the contribution and following years, up to a total of 12 years, based on the income from the donated property. 

Business Cars and Other Vehicles

You can donate a business car or a vehicle used mainly on public streets, roads, or highways. If the fair market value is more than $500, you can deduct the gross proceeds from the sale of the vehicle or its fair market value on the day of the donation, whichever is smaller. You must attach Copy B of Form 1098-C  to your tax return or include a statement with the information on the form.

Note

You can use the ‘blue book” value of a donated car to get its market value. Be sure to use the guide for a private party sale, not the dealer retail price.

Documenting the Gift 

How you document donations depends on the amount and the type of donation (cash or noncash). It’s your responsibility to get a letter from the charity that acknowledges the donation whether you donate cash or assets.

For all noncash donations, you must get and keep a receipt from the charity. The IRS is clear in stating that “without a written acknowledgment, the donor cannot claim the tax deduction.”

For donations of $250 but not more than $500, you must have a written acknowledgment from the charity before you file your tax return or the due date of the return, including extensions. The letter should include the exact amount donated for cash donations. 

If your donation is more than $500 but less than $5,000, you must complete IRS Form 8283 Noncash Charitable Contributions and include it with your tax return, in addition to the acknowledgment.

If your noncash donation is over $5,000, you must have at-the-time written acknowledgment and you must complete Form 8283 and submit it with your tax return. There are also more special rules for donating vehicles, so check the IRS site or speak with a tax advisor to make sure you know how to claim the deduction.

Note

Charities don’t give estimates of value for property donations. You must be able to prove fair market value with an appraisal or some other independent assessment.

Frequently Asked Questions (FAQs)

Can you avoid capital gains tax by donating?

You can’t avoid capital gains tax if you sell a capital asset intending to give the proceeds to charity. The increase in value will likely produce a capital gain which will result in increased taxes for you or your business. If you donate the depreciated asset directly, you'll only receive a deduction for the decrease in value.

How do you record a donated property?

How you record a donated property depends on which tax return you are using. Corporations can record the cost of the donated property as a deduction on Form 1120, the U.S. corporation tax return. Small businesses can’t take a deduction for donations, but the owner may itemize their deductions and then record the cost of donations on Schedule A of their personal tax return.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Instructions for Form 1120 U.S. Corporation Income Tax Return."

  2. IRS. "Publication 535 Business Expenses."

  3. IRS. "Tax Exempt Organization Search."

  4. IRS. "Publication 526, Charitable Contributions."

  5. IRS. "Instructions for Form 1098-C."

  6. IRS. "Publication 1771 Charitable Contributions."

  7. IRS. "Instructions for Form 8283."

  8. IRS. "Topic No. 409 Capital Gains and Losses."

  9. IRS. "Topic No. 501 Should I Itemize?"

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