MAKING CHARITABLE CONTRIBUTIONS THROUGH MY BUSINESS HELPS ME. RIGHT?
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I have heard many times; business owners say that making contributions to charitable organizations gets them a tax deduction. They can save more money in their business by doing this. Well, the true answer is not what they want to hear.
For most of the businesses in the US, the answer is NO. Why not, you say? I gave money for business purposes to a charity. It should count for the same deduction as office supplies or wages. It does not.
There are three main business entities in the US. Sole proprietorships (single owner), partnerships (two or more owners) and corporations (small and large). Of course, you have the LLC (limited liability company) which can be any of those three.
The issue is that under sole proprietorships, partnerships and s-corporations (one of the two types of corporations), charitable contributions are considered pass-through items. Pass through items is not deducted to arrive at the net income or loss of the business. They are passed through or down from the business to its owners. The owners then take the deduction on their personal return just like if they had made the contribution themselves. For a c-corporation (the other type of corporation), the charitable contribution is deductible to a point but that is because a c-corporation is a standalone, tax paying business.
Ok, so I will take the pass-through contribution off my personal taxes then, you say. Well maybe and maybe not. In 2018 we had a major tax change which doubled the standard deduction and eliminated personal deductions. When doing a tax return, you reach a certain point in preparation where you can deduct the HIGHER of your standard deduction or the total itemized deductions you have. Itemized deductions include out of pocket medical expenses above certain amounts, personal taxes paid, mortgage interest and charitable contributions.
The problem is the standard deductions more than doubled in 2018 to almost $25,000 for a family ($12,500 for single) and have been going up each year since. Most people who did have higher itemized deductions under the prior to 2018 rules found out they did not itemize in 2018 and after. With the low interest rates, it is very hard for taxpayers to qualify for itemized deductions.
So those pass through charitable contributions do not effect your return if you do not itemize.
What can you do? First off, pick one or two organizations to support locally. Talk to them about sponsorships of programs, events, etc. and what “advertising” opportunities your business can have. I am not talking about your company name on a giving board in the lobby.
Here is an example from me. I buy a sponsorship package each year for an organization for a large dinner and auction fundraiser. In return I do receive a dinner ticket and merchandise, which I reduce my cost by. What I get is that the organization places my company name in the program brochure, with my logo. They also have a continuous, rolling slide presentation of all sponsors going all night for the businesses who bought sponsorships.
Now do I take 100% of the remaining cost as advertising? No, more like 80% which I classify as Advertising! The remaining 20% goes to charitable contributions. So that 80% of the remaining cost is advertising, which is now deducted as a business expense to determine net income or loss.
So, I went from a nondeductible charity expense to a partially deductible business expense. As always you need to discuss things like this with your tax advisor or preparer. If you do not have one, please call our office for an in-office, ZOOM or phone meeting to discuss your entire tax situation.
Why Growth Increases Employment Risk A business with two employees may feel easy to manage. A business with ten employees needs more structure. A business with twenty employees needs even more consistency. Growth creates more decisions. More decisions create more chances for confusion, conflict, or claims. As a business grows, employment practices can lag behind. The company may add people before updating job descriptions. It may promote a team member into management before training them. It may handle performance issues differently from one employee to another. These gaps are common. They do not always mean the owner is careless. They often mean the business is busy. But employment claims often focus on process. For example: Was the rule applied the same way for everyone? Was the employee warned? Was the complaint reviewed? Was the hiring process fair? Was the manager trained? Was the decision documented? A clear process is easier to defend than memory. The Equal Employment Opportunty Commission advises employers to train managers and employees on equal employment opportunity laws, establish neutral and objective criteria for employment decisions, and monitor practices for consistency. It also recommends fostering open communication and early dispute resolution to keep small issues from becoming legal claims. [4] That is why Employment Practices Liability Insurance works best when it is paired with good workplace habits. Insurance helps protect the business financially. Documentation helps explain what happened. How Small Businesses Can Reduce EPLI Risk Employment Practices Liability Insurance is one layer of protection. Strong employment practices are another. Small businesses can reduce risk by making workplace decisions more consistent. This does not require a large HR department. It does require a simple system. Start with these steps: Use written job descriptions. Create a basic employee handbook. Document performance concerns. Use consistent interview questions. Keep hiring notes professional and job-related. Train managers on harassment, discrimination, and retaliation. Respond to employee complaints promptly. Apply workplace policies consistently. Review termination decisions before acting. Keep payroll and worker classification practices current. These steps help create a better workplace. They also help the business if a claim appears later. The EEOC offers a Small Business Resource Center with free guidance on hiring, training, evaluating, disciplining, and terminating employees. The agency notes that small business owners often do not have legal or HR experts on staff, and the resources are designed to help fill that gap. [5] Owners should be especially careful with terminations. A termination may be valid, but it should still be documented. The business should be able to explain why the decision was made and show that similar situations were handled in a similar way. Good records do not remove all risk. They make the business more prepared.
What EPLI Is Not Employment Practices Liability Insurance is not the same as general liability insurance. General liability usually focuses on third-party bodily injury, property damage, and certain personal injury claims. For example, it may apply if a customer slips and falls at your office. EPLI is different. It focuses on workplace claims. Employment Practices Liability Insurance is also not the same as workers' compensation. Workers' compensation helps cover employees who are injured or become ill because of their work. EPLI helps with certain claims about how employees or applicants were treated. That distinction matters. Many owners assume their business insurance will cover an employee lawsuit. It may not. A claim involving wrongful termination, discrimination, harassment, or retaliation may fall outside general liability or workers' compensation. EPLI is designed to help fill that gap. EPLI also has limits. The Insurance Information Institute notes that EPLI policies may reimburse companies for defense costs, settlements, and judgments. But they generally do not cover punitive damages or civil or criminal fines. [1] Common exclusions may include: Criminal acts Intentional wrongdoing Bodily injury Property damage Workers' compensation claims Certain wage and hour claims Claims known before the policy began Some contract disputes Wage and hour claims deserve extra attention. Some policies exclude them. Others may offer limited defense coverage or an endorsement. The best question is not, "Do we have EPLI?" The better question is, "What does our Employment Practices Liability Insurance actually cover?"
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