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BR Tax Group - Accounting Firm

Tax Effects of a Business Making a Charitable Contribution

Article Highlights:

  • Charitable Contributions 
  • Business-Related Charitable Contributions 
  • Charitable Pass-Through Deductions 
  • 20% Business Pass-Through Deduction 
Charitable contributions are generally allowed as part of an individual’s itemized deductions on his or her income tax return, while a business expense deduction generally isn't allowable for a contribution made to a charitable organization.

However, the IRS recently issued proposed regulations saying that if a taxpayer’s trade or business makes a contribution to a charitable organization with a reasonable expectation of financial return commensurate with the payment amount, the contribution could constitute an allowable deduction for trade or business expenses, rather than a charitable contribution deduction.

Example: Joe, who is a sole proprietor and a dealer in musical instruments, contributes $500 to a nearby church with the understanding that, as a result of the contribution, he will have an advertisement in the church’s concert program. The advertisement includes his business URL from which he sells musical instruments. Joe reasonably believes the advertisement will attract customers; therefore, Joe can treat the $500 payment as an ordinary and necessary business expense.

If no business benefit is derived or if the contribution is excessive for the amount of business benefit, then the payment will be treated as a charitable contribution by the business owner and deducted on the owner’s individual 1040 return, provided the owner is itemizing deductions. If the business is a partnership or an S corporation, a partner’s or a shareholder’s prorated share of the contribution will be passed through to the individual partner or shareholder on Schedule K-1, which also reports his or her share of income, deductions and credits from the business entity.



Making charitable contributions from a business entity has another negative side. Starting in 2018, most business entities (but not C corporations) enjoy a new tax deduction that is generally equal to 20% of the business’s qualified business income (QBI) and is passed through to the business owners for them to deduct on their personal 1040 returns. Basically, QBI is the business’s profit with certain adjustments. One adjustment that reduces the QBI is charitable contributions made at the business level. This is true even when the charitable contributions aren’t deductible and are passed through to the business owners.

It makes far more sense for self-employed individuals to make contributions personally and for partnerships and S corporations to distribute the amount of the intended contribution through to the partners or stockholders, so that they can make the charitable contribution personally, in order to avoid reducing the QBI, which will reduce the 20% deduction.

Long story short, there is no benefit in making charitable contributions from a business; in fact, doing so can have a detrimental tax effect.

If you have questions related to how this might impact you or your business, please give this office a call.



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“Bernard and his team at BR tax group are top notch. This is my first year using them after switching from a different local CPA and I didn't realize how much tax info I've been missing. His communication is great. The additional information he provides to maximize tax savings is something I didn't get from my previous CPA. Thanks Bernard”

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Frequently Asked Questions

You can prepare your taxes yourself, especially if your business is simple.

But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.

Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.

That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.

Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.

Possibly, if it was truly for your business and you have proof.

Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.

Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.

The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.

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