19 Jan Taking a charitable deduction the right way

 Q. My company donated money to a local charity, and we got an advertisement on their web site as part of the deal. They described it as a sponsorship and said it’s tax deductible, but I remember hearing you can’t deduct the whole amount if you get a service in return. If that’s correct, how do I decide which part is deductible?

A. That depends.

Start by asking the charity to send you in writing what the cost of the ad would be.

“The amount of the value of the ad is deductible as a regular and ordinary business expense categorized as `Advertising,'” said Gail Rosen, a Martinsville-based certified public accountant. “Any amount your company paid over the value of the cost of the ad would be deductible as a charitable donation.”

Rosen offered this example: Let’s say you gave the charity $1,000. If the charity said the cost of an ad is $700, then $700 is deductible as advertising and $300 is deductible as a charitable donation.

She said you should remember that regular ordinary expenses such as advertising are deductible for federal, New Jersey, Social Security and Medicare purposes. Charitable donations are deductible only for federal tax purposes, she said.

So let’s take it a step further.

First, you should confirm that the organization is qualified per IRS rules.

Joseph Matheson, a certified public accountant with Matheson & Assoc. in Whippany, said the real questions is whether the payment is required to get the advertising on the site, and if the advertisement on the site can be considered an ordinary and necessary business expense.

“If you believe you get or will get ample business for being listed on the site, then I would say you could take the deduction as a business expense,” he said. ” The IRS would also consider the primary purpose of the contribution and whether the listing on the charity’s site has a value commensurate with the amount contributed.”

That means there’s a lot of gray area here, and Matheson said ”ordinary and necessary” is reviewed on a case-by-case basis.

“What is ‘ordinary and necessary’ for Donald Trump is different than what is ‘ordinary and necessary’ for others,” Matheson said. “By the same token, what is ‘ordinary and necessary’ differs by the type of business. That is what is ‘ordinary and necessary’ for a manufacturer is completely different than what is ‘ordinary and necessary’ for an accountant.”

He said self-employed individuals and small businesses who want the limited liability protections of a corporation but the simplicity of individual tax preparation might choose to register as an S-corporation. That’s important because income from the S-corporation passes through to shareholders, who pay the tax bill.

“The corporation must file Form 1120S to report its income and expenses. It also must distribute Schedule K-1 to shareholders so that they can include their portions of the income and deductions on their personal returns,” he said. “Assuming the taxpayer is a 1040 Schedule C or 1120-S filer, donations would still be deductible on schedule A.”

He said an S-corporation qualifies for the same charitable deductions that apply to individuals. Generally, allowable deductions cover contributions to religious organizations, governments, non-profit schools and hospitals, war veterans’ groups, and any organization able to accept tax-deductible contributions.

“The corporation can’t deduct contributions to most foreign organizations, or to social clubs, sports leagues, lobbyists, profit-making organizations, non-student individuals and political groups,” he said.

The Internal Revenue Service limits the total of all charitable contributions to 50 percent of an S-corporation’s adjusted gross income, with some variations in specific cases, Matheson said. The 50-percent deduction limit applies to most charitable organizations, but certain organizations have a 30-percent limit, including veterans’ organizations, fraternal societies, live-in students and nonprofit cemeteries. “Capital gain property,” which is any property that would have produced a capital gain if it had been sold instead of donated, has a deduction limit of 20 percent or 30 percent, depending on the recipient, he said.

“No matter what, you must keep proper records, such as bank statements or cancelled checks,” Matheson said. “If a cash contribution exceeds $250, you will need a receipt from the charity. Non-cash contributions require stratified levels of documentation, including Form 8283, depending on the contribution’s value. You can use Worksheet 2 of Publication 526 to apply the deduction limits.”

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This story was first posted in January 2015.