Corporations commonly use matching programs to increase the amount of charitable donations made by their employees. However, in addition to the intangible benefits of helping needy charities, there are tax benefits of which a corporation can take advantage. For federal income tax purposes, the donations a corporation matches aren’t attributed to employees, but are instead deductible on the corporation’s tax return.
Taking Corporate Deductions
The Internal Revenue Service requires corporations to file annual tax returns on Form 1120. In addition to the ordinary business expenses a corporation is eligible to deduct, Form 1120 also allows for a charitable contribution deduction that covers all cash and property a corporation donates to eligible charities. Eligible charities include organizations that solely operate to promote religious, educational, literary, scientific and humanitarian causes, as well as government agencies, fraternal societies and veterans’ organizations. However, for charitable donations to be deductible by a corporation, the recipient charities must have tax-exempt status from the IRS.
Accelerated Charitable Deduction
General income tax principles require taxpayers to wait until the tax year in which the charitable donation is actually made before taking it as a deduction. However, corporations that report income taxes on the accrual basis of accounting -- meaning they report deductions in the year expenses are incurred rather when actually paid – are eligible to accelerate the timing of their deductions for charitable donations, including those that are made through an employee matching program. As long as the donation is actually made by the 15th day of the third month after the close of a corporation’s tax year, a corporation can take a deduction for the donation on the tax return that covers the prior year. For example, suppose a corporation’s 2014 tax year ends on December 31, 2014. When it files its 2014 tax return, it can claim a deduction on the 2014 return for all employee donations it matches by March 15, 2015. Normally this donation would not be deductible until the corporation filed its return for the 2015 tax year.
Excess Matching Donations
There are some limitations on the annual amount of charitable donations a corporation can deduct on a single tax return. Corporations cannot deduct contributions that total more than 10 percent of its taxable income. However, in years a corporation implements an employee matching program, the total amount of donations it makes may exceed the 10-percent threshold since payments are contingent on the donations made by employees rather than at the discretion of the corporation’s management. Further, a corporation will not lose the tax benefit of making large amounts of donations during the year since the IRS allows the excess amounts to be carried over for five years.
State Corporate Deductions
When increasing the amount of charitable giving through an employee matching program, the corporation can also take advantage of state income tax benefits. Many states base their corporate income tax returns on the federal Form 1120 and allow corporations to report the same charitable donations used to claim a deduction on a federal return on the state corporate return as well.
References & Resources
- IRS: Instructions for Form 1120
- IRS: Publication 526 – Charitable Contributions
- Cornell University: Code of Federal Regulations – 26 CFR 1.170A-11
- Maine Revenue Services: Maine Corporate Income Tax Return Instructions
- The T. Rowe Price Program for Charitable Giving : Understanding IRS Limits on Charitable Gifts