Charitable Giving and Tax Deductions for Small Businesses

Corporate social responsibility is considered a privilege enjoyed by large businesses. However, it is not limited to big corporate houses. Many small businesses are striving to make a social impact by giving back to their communities through charitable giving. It helps them build customer loyalty in their region and increase sales through local consumption of goods and services. Many small entities took up charitable giving after the pandemic to generate high local sales and stay stable.

These donations are tax-deductible, which helps to reduce taxable income and improve cash flow. These donations must be made to registered charities endorsed by the Australian Taxation Office (ATO) as a deductible gift recipient to leverage the benefits. Entrepreneurs must understand charitable giving and tax deductions to fulfil their philanthropic desires and work for the greater good.

1. Charitable Giving by Small Businesses

Charitable giving is a common way for small businesses to earn the trust of their target audience and work for causes that resonate with the values of the entity. More than 70% of small businesses use this philanthropic activity to make regular donations or sponsor community drives. These ventures can donate up to 6% of their profits to charities.

Donations above $2 are eligible for tax deductions if they are made to a deductible gift recipient (DGR) charity. However, the donation should not offer any benefits to the business. Entrepreneurs can identify DGR charities by searching for them with the help of the ABN Lookup tool. They can choose to make monthly donations or pay just once or when there is a request from the charity. They can also donate gifts in the form of money, shares and properties.

2. Claiming Tax Deductions for Charitable Giving

Small businesses can claim deductions based on the type of donation made to the chosen charity. If they donate more than $2 in cash or offer shares and property, they can claim tax deductions. Certain heritage and cultural gifts are also deductible. Entrepreneurs should not receive any material gains in exchange for these donations to be eligible for the deductions.

They can receive token items, such as merchandise or promotional material provided by the charity, such as stationery. The tax deduction can be claimed in the same financial year as the donation or distributed across five financial years. Charitable giving improves brand image and helps in the sale business online when the owner decides to exit.

3. Donations that Cannot Be Claimed

Entrepreneurs must be aware that they cannot claim gifts and donations that come with material gains. These include buying raffle tickets, purchasing products at their advertised prices, attending fundraising dinners, paying for club memberships, donating to school building funds in exchange for a benefit, and giving gifts to family and friends for any reason.

In addition, donations made with the intention of receiving benefits from the recipient and those made under a will are not tax deductible. Many small businesses make charitable donations through crowdfunding websites for a positive social impact. These are not deductible unless the website is operated by a deductible gift recipient.

4. Maintaining Records of Charitable Giving

It is essential to keep financial records of all donations made by a small business because bookkeeping is vital for budgeting, cash flow forecasting, and tax planning. It also helps the business get funding easily and even effortlessly sell the business online when the owner plans to retire or switch to another field.

The evidence to be submitted to the ATO must include receipts of the donations or a signed letter from the charity stating the receipt of the donation and its amount. If the charity does not provide a receipt, the business owner can provide evidence in the form of bank statements.

5. Purpose of Tax Deductible Donations

Small businesses do not have surplus cash like big corporate entities. Thus, the government offers tax deductions for charitable giving to encourage these donations and improve the conditions of communities in need of funds and support. The tax benefit offered by the government helps small and medium-sized businesses get something back for their generous behaviour.

Since taxes are the most dreaded part for entrepreneurs, saving on the tax bill feels like a big achievement and inspires them to make more donations.  It can also work in favour of the entrepreneurs when they advertise for the sale of business online. It will help find buyers quickly because of the visibility of the brand in the community due to its philanthropic work.

6. Process of Claiming Tax Deductions

Small businesses in Australia can claim tax deductions for most of the business expenses that help them earn an assessable income. Besides charitable giving, entrepreneurs can claim deductions for expenses incurred during daily operations, buying products, equipment and supplies and capital expenses. The tax return can be filed online with the help of a tax agent and must have details of the income and the deductions claimed.

Wrapping Up

Charitable giving is a compassionate activity performed by entrepreneurs that helps them make a difference in their community. It helps them support a cause and work for their people. The government ensures they are repaid for this deed by offering tax deductions.