We sat down with Regan, the CEO from Metrics Chartered Professional Accounting, to learn about the tax benefits of making corporate charitable donations. Metrics is heavily involved in the local sphere, giving back in a wide variety of ways, and their team can speak personally to the business-related pros of supporting local communities.
The Tax Benefits of Giving Back
There are plenty of obvious benefits to launching a quality community marketing strategy or as we like to call it a corporate philanthropy strategy. You’ll attract the right kind of employees, motivate more consumers, and make a real contribution to the betterment of the world. But that’s not all: the financial donations you make to local charities – not to mention some donations of your time – can all be put to work during tax season to provide a helpful tax break.
Before we discuss the business side, let’s talk about the difference between donating personally and donating through your company. There is some misconception around whether it is more beneficial to your financial situation to donate your personal income or your company’s profits. Some of this confusion stems from the fact that on paper, the tax credit percentage for personal donations is higher than that for corporate donations.
There’s a perfectly logical reason for this: the donation you made personally was already taxed when you received your paycheck, while the donation through your company was made with funds not yet taxed. When the credit is issued, personal donations receive both the tax credit and a refund on the paycheck tax, and corporations receive only the tax credit. In a final comparison, the rebates should be relatively equal.
The donation you made personally was already taxed when you received your paycheck, while the donation through your company was made with funds not yet taxed
Most accountants (Regan included) will tell you it makes more sense to donate on the corporate side. When you donate through your company, you reap the benefits of good karma as well as the extra bonuses mentioned above. Here are a few things to keep in mind once you’ve decided to start making donations through your business:
Not all non-profits are created equal
Your business will only receive a tax credit on donations made to registered charities, and not all non-profits fall into this category. To be considered a charity, the organization must meet specific criteria, and have registered for, and been issued, a charitable registration number. This number should be easy to find on the organization’s website.
Donating money isn’t the only way
While generous, your company volunteer trip to help out at a soup kitchen can’t be written off as a tax credit, but that doesn’t mean monetary donations are the only way you can benefit financially.
“In-kind” donations are another way to give back while still slashing your tax return. These contributions involve a donation of your professional services or products you sell, free of charge, such as an accountant doing a charity’s taxes pro bono, or an office supply company outfitting an organisation’s workspace.
When it comes to in-kind donations, it is necessary to note a few caveats: first of all, you will want to prepare an invoice for the service or product, even though you will not be receiving payment. This serves as proof that you have “charged” fair market value for the donation. The invoice should identify a rate comparable to an existing company invoice.
Secondly, your donation must be an expense the charity has at other times had to pay for, so it is clear from both sides (your company and the charity) that your in-kind donation saved the charity money; for instance, if the charity did their own accounting in past years, instead of paying to have it done, our initial example is not a viable donation.
Recognize the difference between donations and marketing expenses
A donation qualifies only if you, the business, received nothing in return for that contribution. If your gift to a registered charity resulted in an advertisement for your company in their monthly publication, you cannot claim that contribution (at least not the full contribution) as a donation, though you can claim it as a marketing expense (just like the other advertisements you purchase throughout the year).
When it comes to combo donation/marketing contributions, the easiest example is a plated dinner fundraiser. You received a meal in exchange for your donation, so you cannot claim the full amount. However, it’s likely you will be able to claim some of it. If your ticket cost $175, and the meal was worth $100, then you have made a $75 charitable donation to the cause. Often, the organization will make this determination easy by issuing you a charitable tax receipt (containing their registered charity number) for only that $75.
Keep good records
Speaking of tax receipts, they are as essential as your business expense tracking when tax season rolls around. No charitable tax receipt, no refund. Some charities will write up a receipt for you on the spot, handing it over when they accept your cheque. Others keep track of donor information, and issue all their receipts at the end of the year.
Either way, maintain a list of charitable donations made, and make sure your receipts match that list before you file your tax return.
Share the wealth
Charitable tax credits are non-refundable. That means that you can use them to lessen what you owe in taxes, but if your business happens to be eligible for a rebate, you won’t get that money back. If, one year, you are set to be receiving a tax credit amount (you lucky dog), you may want to keep your charitable tax credits for another year. You have five years from the date of donation to claim those amounts, so save them for the year when you most need the tax break.
Always remember, there is no shame in benefiting from your charitable contributions. Whether you receive a tax break and win over new customers, or keep it all to yourself in the interest of humility, you are still making a powerful difference to that organization. Why not further your business at the same time?
It’s not too late to make a donation before the end of this calendar year. Connect with HeartPress PR to help you make the right giving decisions for your company.
Sources: Regan from Metrics Chartered Professional Accounting, Advisor, the Balance and MNP LLP.
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