Today TaxMama hears from Diane in Florida who’s very generous. “My friend and I have an LLC.
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We elected to be treated as a sub chapter “S” Corp. We plan to donate 50% of our net profits to charity.
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Can our LLC make this donation each year and take the business deduction? This annual donation would be made prior to any yearly distribution of income to my partner and me.”
Dear Diana,
That’s an interesting question.
First let’s look at the rules for corporations to deduct charitable contributions in the first place. The deduction for a C corp is limited to 10% of profits.
However, you’ve elected an S corporation status. Two things to know about S corps:
1) They don’t pay federal taxes
2) They don’t take deductions for charity at all.
So what happens to the contributions in an S corp?
They end up on your personal Schedule A. You get the deduction on your own personal tax return. Typically, you can take deductions of cash or money up to 50% of the income on your tax return.
So what happens if you can’t use all the contributions? They get carried over to the next year’s tax return. You’ll be able to use them in future years until all the contributions run out.
Incidentally, if this S corp is an operating business, you and your ‘partner’ (called a Member in LLCs) need to be taking reasonable wages.
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You need to have a payroll. Invest in a good, local tax professional to help you set all this up properly.
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Otherwise, the good works you’re planning will be overshadowed by the tax problems.
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And we wouldn’t want that.
And remember, you can find answers to all kinds of questions about corporate donations and other tax issues, free. Where? Where else? At TaxMama.com
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