Charitable donations from S-Corp
Submitted by Anonymous on Thu, 2008-02-21 09:08.
Linda,
I am the owner/sole employee of my S-corp. Can my S-corp make charitable donations (assuming cash donation and getting receipt from the charitable organization)? Is this a qualified expense for my S-corp?
I personaly don't itemize on 1040 and every year I donate more than $1000. Assuming I am at 25% tax bracket, I can save $250 by donating from my S-corp.
How to handle this in Quick Books ?
Regards,
Jewel.
S-Corp Donations
Actually, you won't get the tax benefit of the donation.
Certain items, like charitable contributions flow to the personal part of your return. So even though the S-Corp makes the donation it's reported to you on the K-1 and then you report it on your Schedule A.
Since you don't itemize you wont get the tax benefit of the contribution.
However, when the S-Corp make the contribution, that means you don't have to take that money out as salary & so save the payroll taxes.
In QuickBooks I like to create a Charitable Contributions account in the Other Expenses account type. That way it's easier for me to reconcile the ordinary net income with the tax return.
Hope this helps.
L:)
Question on how to avoid FICA tax on Charitable Contributions
Linda, I read your comment that by giving charitable contributions through your S Corp, you don't have to take that money out as salary, so you can save the payroll taxes. I thought that was the case, and a CPA told me that as well. Since the FICA tax alone is over 15%, that can be a big savings.
But I see a problem with that. I'm doing my own tax return and the 1120S form instructions say you aren't allowed to claim deductions under "Other Deductions" that must be reported separately on Schedules K and K-1, so the charitable contributions are not deducted from the calculation of your "Ordinary business income" on line 21. So, if I am not mistaken, you list the ordinary business income on your 1040, and the charitable contribution in your itemized deductions. You can only "avoid" paying income tax on the charitable contribution by paying yourself that much as a distribution.
It looks to me like that leaves the classic issue of "reasonable salary vs. distribution" open to the IRS's scrutiny, leaving you open to the possibility that it will be re-classified as salary. That would leave you having to pay the back FICA tax (plus late penalties and interest), and using the S Corp's charitable contributions as a personal tax deduction - exactly like all regular W-2 employees. In fact, that looks like no accident to me. It looks like that's their intention - that charitable contributions "flow through" to your personal tax return, but are not deducted from your salary.
Is there any ruling by the IRS, or some acceptable justification to classifying an amount equal to your charitable contributions as distribution income, not subject to payroll taxes?
If not, I don't see a good way to defend it in an audit. It would sure be better if it is a cut-and-dried situation.
Do you have any additional insights on this?
Thanks very much. Charlie