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For small businesses, donations are one way that they can help the community and foster good relations with their customers. Small business owners should know that tax deductions on charitable contributions are available to them as the calendar year ends.
Like individual charitable contributions, businesses can also deduct some donations they make. However, business owners should be aware of some key rules so they can maximize their deductions -- and not run afoul of IRS regulations. Rules such as:
Charitable contributions are usually not business expenses. This area can be tricky. If you make a payment to a charity that is not mean to be a contribution or gift, the amount can be deducted as a business expense.
For example, say you pay a church money to run an advertisement in one of their event programs. Your primary goal is to increase your customer base. This could be considered a business expense. But if you donated for the sake of donating, it isn't.
If you donate inventory, make sure to follow specific rules. The amount you can deduct for inventory donations is the smaller of either the items' fair market value the day you donated it, or its basis. Businesses also need to remember to take out this inventory from their opening inventory and remove it from their "costs of goods sold."
There are special rules that apply if you donate food inventory from your business to a charitable organization that uses the food to care for the sick, the elderly, or children. IRS Publication 526, linked above, has a special worksheet that is used to determine how much businesses can deduct.
Make sure the organizations you donate to qualify. Donations to most charitable organizations and non-profits are deductible. To make sure you're following the rules, it may be wise to check up on the IRS website to ensure the group you are donating to will qualify.
Keep these simple small business tax deductions in mind, and your business donation can ultimately help your bottom line while assisting those in need.
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