You may be further incentivized to donate this holiday before the year ends. Individuals and business owners can make a huge difference in our community by putting their money to work through charitable donations. Make the most of your generous contributions by getting a more significant tax write-off this year through the methods listed below.
For Business Owners
The type of entity you are makes a difference in how you want to donate. You may be a Sole Proprietor, LLC or S-Corp, or a C-corporation.
If you are a C-corporation, you can take any charitable contribution you make and use it as a tax deduction for your business.
If you are a Sole Proprietor, LLC or S-Corp, you don’t pay taxes at the business level. Even if you make a charitable contribution from your business, it won't be deductible directly from your
business taxes. In other words, it won't lower your taxes. The only way you can make your contributions deductible is to make it an itemized deduction on your Schedule A.
Standardized deductions increased dramatically in 2018, which made it less likely for people to itemize their deductions. The standard deduction threshold for 2021 is $12,550 for single individuals or $25,100 for couples. That means if you make under this amount, you are exempt from paying taxes, and it is not worth it to itemize your tax deductions.
If you make over this amount as a Sole Proprietor, LLC, or S-Corp, you will want to consider itemizing your deductions. What counts as itemized deductions? Real estate taxes, mortgage interest, charitable contributions, and significant medical bills that are not covered by insurance. If you have a considerable amount of itemized deductions and this amount puts you above the standardized threshold, you will receive a larger tax break than if you had used the standard deduction method.
There are a few exemptions to the standard deduction, and there are a few things you can do to make the most out of your charitable contributions regardless of how much you make. Instead of making cash contributions, can you sponsor a charity at an event with some form of marketing, this counts as a marketing expense. Bonus, there is no threshold for your business to deduct it. You get the benefits right from the first dollar you spend. If you cannot sponsor a charity, you can gift inventory. If you have some things sitting around that you may not use, giving them to charity enables you to write off the cost of that inventory on your tax deductions.
Bunch your charitable donations. Load all of your charitable donations from two years into one year. How do you do this? If you make your charitable contributions for 2022 on Jan. 1st, then you make your contributions for 2023 on Dec. 31st, 2022; both will count for the same year. That means you are more likely to go above the threshold on itemized deductions enabling you to write off more of your donations than you usually would. If you use this method, you would most likely bunch one year and then the following year use the standardized deduction method. This is something that financial investors take advantage of that can be used by the public.
If you have a regular investment account, this next charitable tax deduction tip can be a game changer, donate your stock to a donor-advised fund. This is when you donate a stock that has appreciated in value that you would like to sell to a donor-advised fund. Donor-advised funds are private funds for philanthropy. When you do this, you will receive a charitable deduction for what you paid for it originally, plus its appreciation value! Which is better than selling stock because you will have to pay capital gains tax on it which would cost you more.
Before implementing any of these tax deduction techniques, talk to your financial advisor to ensure you make the right choice. And be sure to check that the charity you donate to is tax
deductible because not all are. Being savvy about taxes enables you to give more and make the most out of your money. In other words, you will have a bigger impact.