Legally Speaking on Charitable Giving
Are you looking for tax deductions individually or for your business? Business and individual charitable giving makes a valuable contribution to our quality of life. In this economy, the community need is great. But before you write the check, make sure you understand the basics of giving.
Goodwill is the main reason that individuals and businesses make charitable gifts, but giving has other important benefits. In most cases, gifts may be deducted as charitable contributions on income tax returns. That means your out of pocket cost is actually less than the amount given because of the federal and state tax savings – the benefit is that your cost is matched partly by the reduction of tax. Effectively this means that you receive a benefit because the cost is less and the charity receives a benefit because more can be given for the need the charity is addressing.
However not all giving qualifies as a deduction on your tax return. The deductibility of charitable contributions is governed by a fairly strict set of laws that make it most important to understand the ins and outs of charitable contribution deductions before you give. A charitable deduction isn’t allowed unless you can prove your right to it. Your burden includes showing that the recipient is a qualified charity and having substantiation required for the deduction.
In order to qualify as a charitable deduction, contributions must be made to a “qualified charitable organization.” Qualified charities include religious organizations, educational institutions, governmental agencies, and other charitable organizations and foundations. The burden is on you to show that a recipient is qualified. Most charitable organizations have obtained a federal designation referred to as a 501(c)(3) because this designation assures that the charity meets the first requirement for you to receive a tax deduction.
The IRS publishes a listing of the entities that they recognize as qualified, i.e., eligible to receive tax deductible charitable contributions. The list is accessible on line at irs.gov as Publication 78; for organizations that have applied for and received recognition, a letter from the IRS setting forth its particular designation would have been received. Upon request, the charity should provide a copy of the IRS letter to you, and after you assure deductibility, any contribution you make should be to the name listed or on the IRS letter assuring proof that the contribution was made to a qualified charitable organization. Although organizations not on the list may qualify, if not listed, the deductibility of your donation may be in question.
Substantiation means the verification required by the tax law to be able to take a tax deduction. For monetary contributions, you can’t deduct any amount unless you have a bank record such as a cancelled check (or a written communication from the charity showing its name, plus the date and amount of the contribution). For contributions other than money, you must have a receipt from the charity and keep other records describing the gift. For any contributions of $250 or more, non-cash contributions exceeding $500, contributions of cars, boats, or other property, there may be other more stringent substantiation required.
In businesses every dollar may not purely be a charitable deduction for tax purposes but may be marked as a business expense. For example, you may desire to support a local nonprofit and your business contribution is recognized through publications, plaques, signage, etc. The benefits are not only that your business plays an important role in a cause you believe in, but your business may also get a boost through existing and new customers or clients who recognize your business contribution rather than patronize a business that does not give back.
For more information on how you or your business can participate in and benefit from philanthropic activities, call Mark Jinkins or Dick Hauser at Pinkert Law Firm 920.743.6505. Both Jinkins and Hauser focus on tax and business matters (including nonprofit entities), from formation, during operation, and through transfer to and receipt by the next generation or third parties.