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Different types of businesses are treated diversely for tax purposes based on the various charitable contributions available. For instance, the way a tax is imposed for a sole proprietor is different for a partner in a partnership business. Moreover, the same tax variation is noticed in the 100% corporate shareholders and S corporation business. The current study aims to provide an understanding of such alterations, deliver an example of a prerequisite of an eligible charitable contribution, and explain how the diverse rules might impact a decision-making process in charitable contribution.
A Sole Proprietor
All sole proprietors are required to pay and file business taxes on their individual form 1040, indicating that they are a pass-through entity in tax filings. All business taxes are filled in a Schedule C, with all charitable contributions taxes filled in Schedule A because a sole proprietor files as a person or as a joint. A taxpayer needs to be entitled to partake in a documented deduction; otherwise, such charitable contributions will be tagged below the standard amount. The taxpayer must also ensure that all general restrictions are adhered to (Rupert & Anderson, 2019). For instance, one cannot claim more than half their adjusted gross income (AGI) in a particular year.
100% Corporate Shareholder
Corporate shareholders, especially the 100%, indicate a different tax entity and its file is dissimilar to other tax forms, as long as an individual does not choose to file another taxing entity. In this regard, deductions are imposed for charitable contributions as demanded in the tax form 1120 for all corporations rather than personal taxes. However, according to Rupert and Anderson (2019), certain situations can lead to higher charitable contribution deductions. For instance, an endowment of inventory by a C corporation to particular private aids can result in such large deductions (Chu et al., 2018). Therefore, corporations should note the different available guidelines in donations to maximize benefits during charitable inferences.
Partner in a Partnership
Just as the sole proprietor, a partner in a partnership is another good example of a pass-through entity in tax filing. In essence, all expenses and joint income, including the charitable donations, are shared accordingly and based on the partner’s Schedule K-1, noting each individual’s contribution as a percentage. Once shared with regards to each person’s percentage, the amounts are then filed on the Schedule K-1, necessitating the claims to be made concerning gains, losses, or other charitable contributions as reflected in form 1040.
100% S Corporation Shareholder
As illustrated in the partner in a partnership, the 100% S corporation shareholder is performed the same way. However, since they are 100% ownership, their form includes the Schedule K-1, which is responsible for 100% of the contribution. According to Murray (2020), there is a limitation of up to $250, which can be overlooked if the particular charitable company formally writes to the tax revenue body, an acknowledgment indicating all amounts of cash contributions. Disclosing all the valuations of properties and values of goods and services can also result in the by-passing of such limitations as $250 limits.
Example of a Necessity and Its Effect on Contribution Decision
A prerequisite qualification for charitable contribution tax deduction is only attainable if it is made against an eligible corporation. Such a company must be: a) a corporation, foundation, religious entity, educational group, or any other non-profit company; b) domestic fraternal society; c) war veteran’s company; d) the U.S., or any other state in the U.S.; d) cemetery which is a non-profit corporation. Assuming a 100% C corporation shareholder is a director of a religious group, who wants to donate to a member of the same organization, in this case, if the director donates directly to the member, there will be no deduction. However, donating to the religious group with an indication of the purpose of the donation, then it would be treated as a deductible charitable contribution. Therefore, one should be cognizant of the prerequisite charitable contributions before making decisions on certain types of donations.
References
Chu, L. Y., Li, G., & Rusmevichientong, P. (2018). Optimal pricing and inventory planning with charitable donations.Manufacturing & Service Operations Management, 20(4), 687-703. Web.
Murray, J. (2020).How to deduct charitable donations. The balance: Small business. Web.
Rupert, T., & Anderson K.E. (2019). Pearson’s federal taxation 2019 individuals (32nd ed.). Pearson.
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