Did you know that you can’t write off charitable contributions as a business expense (unless your business is incorporated)? Yup, that’s right. Charitable contributions are considered a personal expense if you are organized as a sole proprietor, a partnership and LLC, or an S Corp.
The proper way to record a charitable contribution within your business is recorded as an equity draw. You can only record cash out-of-pocket cost that you are impacted by, and you can’t write off the cost of your time or your services.
For example, let’s say that you are a floral designer, and you donate flower arrangements to a nonprofit organization. Let’s also assume that your out-of-pocket cost for the flowers is $1000, and you donate them in the form of 10 flower arrangements to the organization. Even if your services would normally cost $5000 you can only record $1000 as a donation. You must record this as an equity draw.
The tax deduction comes into place within your personal deductions. Your CPA will tabulate all of your personal deductions (mortgage interest, childcare expenses, and charitable contributions – your ‘standardized deductions’). It is here that you get the write-off and the tax benefit of a charitable contribution.
Depending on your tax situation, your CPA may advise that you record these contributions as a marketing expense. If your itemized deductions don’t total enough to use the calculation, it may benefit you to call it a marketing expense rather than an equity draw that gets itemized as a donation.
This is a really great article from Fox Small Business that explains this in greater detail.
Is this super confusing? Shoot me an email and I can help with the accounting. If you need Tax Advisement, I recommend that you talk to your CPA. (I can refer good one to you if you need one.)