In a NutshellDonating to charity not only helps those in need, it can indirectly help your small business too. Check out these tips on charitable deductions for self-employed people that may help you reap some tax benefits for the giving you do.
This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2019 tax year.
One of the most challenging things to deal with when you’re self employed — aside from being your own boss — is being responsible for your own taxes.
If you’re self-employed as a freelancer or independent contractor, your business income and deductions get reported on your personal income tax form. You probably pay estimated quarterly federal income taxes. And you may rely on deductions and credits to help decrease your tax bill.
Making charitable donations and taking a charitable deduction could help you lower your tax obligation while supporting a worthy cause.
However, the IRS has specific rules around deducting charitable contributions. If you plan to claim this deduction on your tax return, it’s crucial to know what does — and doesn’t — qualify.
Not sure if your charitable donations qualify for a deduction? Here’s what you should know about charitable deductions for self-employed workers.
What qualifies as a charitable contribution?
Generally, the IRS considers cash, inventory or service donations, charity sponsorships, property and volunteered services to be eligible donations. You must itemize your deductions on Form 1040, Schedule A to claim a deduction for charitable contributions.
However, there are some caveats.
With volunteered services, you can’t deduct the actual cost or value of the services you provide. But you can deduct the expenses associated with performing that service. For example, if you’re a lawyer doing pro bono work for a nonprofit, you can’t deduct your billable hours. However, you can deduct court filing fees and some travel expenses.
Cars, aircrafts, boats, household goods, books, clothing, paintings and jewelry all count as property under IRS rules, and the agency has specific guidelines for determining the value of donated property, according to Crystallyn Shelton, tax analyst at FitSmallBusiness.com.
“If you donate property, you can deduct the fair market value of the property at the time that the donation was made. For example, if you donate a vehicle, then the [Kelley] Blue Book® value of the car for a private party sale at the time you donate it would be considered the fair market value of the car,” she says.
Rules also apply to charitable contributions in which you get something in return for your donation. For example, let’s say you attended a charity auction and bid $7,000 on a trip to Greece, but the actual fair market value of the trip is $3,000. You can only deduct $4,000, which equals what you donated minus the benefit you received in return. And you must be able to demonstrate that you knew you were donating more than the fair market value of the trip. In this example, you might cite the trip’s listing in the auction catalog if it showed an estimated value of $3,000 for the prize.
What organizations can I donate to for a deduction?
Your donation also must be made to a qualified charity to be eligible. Contributions to political organizations, candidates or individuals don’t count.
If you’re not sure whether a charity you want to support qualifies, use the IRS’ Exempt Organizations Select Check online tool to find out whether the organization is eligible to receive tax-deductible charitable contributions.
The time crunch
Don’t delay in making a charitable contribution if you would like to take this deduction. You only have until Dec. 31, 2019, to make a new donation that could count toward your 2019 tax return, which you’ll file in 2020.
If you made donations throughout the year, but didn’t keep track of them, it’s not too late. Try reaching out to those organizations to request documentation that could help you claim a deduction for those contributions. And you can make keeping better track of those donations one of your personal and professional New Year’s resolutions!
Business structure and charitable deductions for the self-employed
“Unless a business is organized as a corporation, charitable contributions are treated just like they are for individual taxpayers,” says Rebecca Pavese, CPA, a financial planner and portfolio manager with Palisades Hudson Financial Group.
If a business is a corporation, it can take a deduction for eligible charitable contributions that are not more than 10% of its taxable income for the given tax year. Some of the same limitations that apply to individuals also apply to corporations, such as contributions must be made to a qualified charitable organization.
Some special rules apply for farmers, ranchers and native corporations. If one of those categories applies to you, you might want to check with a tax professional. Other business entities (including you, freelancer/sole proprietor) can generally deduct no more than 60% of their adjusted gross income. Keep in mind, though, that the nature of the charitable gift and the type of organization you donate to may lower the deduction limit.
Other important things to know
You can’t deduct charitable contributions as a business expense, which means the donations generally have no impact on self-employment taxes, says Pavese of Palisades Hudson Financial Group. However, there is an exception.
“If you sponsor a charity and they advertise for you in return, this is now an advertising expense and can be deducted as such. If you give money to a charity and receive something in return, that’s when the character of the deduction changes from a personal charitable contribution to an ordinary and necessary business expense,” she says.
The Tax Cuts and Jobs Act affected the charitable contribution deduction beginning with the 2018 tax year. Prior to tax reform, the deduction limitation was 50% of income. And it suspends the overall limitation on the total amount that higher earners could take for total itemized deductions, which would include the charitable donation deduction. This means that for tax years between Jan. 1, 2018, and Dec. 31, 2025, your ability to take this deduction is no longer limited by your income.
How to ensure a deduction for charitable contributions
To ensure you qualify for a deduction for your charitable contributions, you must fill out the proper tax forms. Small-business owners who have a sole proprietorship or a single-member limited liability company, and who want to take a charitable contribution deduction, must make their donation to a qualified charity. Like individuals, they also will need to itemize deductions instead of taking the standard deduction to be eligible.
If you’re part of a partnership, multi-member LLC or S-corporation, report charitable contributions on Schedule K-1 based on the share of the company you own.
Corporations should report charitable contributions on their corporate tax returns, which is IRS Form 1120.
Shelton also says small-business owners and freelancers should keep adequate documentation of their charitable contributions.
“As with any tax deduction, the burden of proof lies with you, the taxpayer,” she says.
For a cash contribution, you should have a bank record or written communication that shows the name of the exempt organization, the date of the donation and the amount. A canceled check, bank, credit union or credit card statement, a receipt from the organization or a pay stub for payroll deductions all should suffice as proof.
For non-cash contributions of less than $250, a receipt that shows the name of the organization, the date, location and a detailed description of the property you donated should suffice.
For non-cash contributions of more than $250, you should request a written acknowledgement of your contribution. The acknowledgement should include a description of the property you donated and whether you received any goods or services in exchange for the donated property. These rules for non-cash donations do not apply to vehicles, boats or airplanes if the claimed value is more than $500.
Getting a charitable deduction when you’re self-employed is an added bonus for giving to a worthwhile cause that seeks to better other people’s lives. Plus, donating may engender some goodwill for your business in the community.
Don’t leave potential tax benefits on the table by keeping bad records of your donations or by donating to an organization that doesn’t qualify under IRS rules. Doing a little research before you donate can help you take full advantage of this tax deduction and potentially lower your tax bill.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.