If you own an S corp, you may be wondering, “is it more beneficial to donate through my S corp or as an individual?” Can an S corp donate to charity? The answer to this is “yes”, S corps can donate to charities and in my opinion there is a greater advantage to donate as an S corp. However, there are specific considerations and tax implications to keep in mind:

Can an S Corp Donate to Charity?

Example of Deduction Pass-Through

If an S corp donates $10,000 to a qualified charitable organization (501(c)(3)) and has five equal shareholders, each shareholder would receive a Schedule K-1 showing their share of the contribution, which would be $2,000 each. The shareholders can then include this amount on their individual tax returns.

Why It’s Beneficial To Donate Through an S Corp (Rather than Individually)

1. State Deductions: Certain states have a replacement or franchise tax for S corps. For example, Illinois imposes a 1.5 percent replacement tax on S corp profits. Illinois allows charitable donations as a deduction. Lets say a business has $100,000 of ordinary profits and $5,000 of charitable donations. On an IRS K-1, your business would be taxed on $100,000 (there is no difference between donating through an S corp and personally for IRS purposes). However, on an Illinois S corp tax return, your business would pay the 1.5 percent tax on $95,000 ($100,000 ordinary profits less $5,000 of charitable donations), $1,425, rather than 1.5 percent of $100,000, $1,500. In this example, you would save $75 by donating through your S corp. It should be mentioned that not all states impose a tax on S corps.
2. Tracking: It’s likely your business bank and credit cards are connected to an accounting system such as QuickBooks Online. Making charitable donations through a business bank or credit card will be easier to track as it will sync with your accounting system. During the coding phase, any contributions will be properly classified as a donation. If you make payment on a personal credit card or bank account there is a greater likelihood the donation will fall through the cracks and not be captured as an itemized deduction during tax time. Since S corp donations are included on your K-1, it’s very hard to miss when preparing your personal tax return.