The tax treatment of charitable contributions made by an S-corporation is something that clients sometimes question. Here’s a brief overview.
Short and Sweet Version
Here’s the basic rule: if an S-corp makes a charitable contribution, the contribution is not deductible on the S-corp tax return, but is instead taken as a deduction by the corporation’s shareholder(s).
Joe the Window Washer is the sole shareholder of his S-corporation. The corporation’s gross income was $100,000, and deductible expenses totaled $60,000. The corporation also made a $1,000 contribution to a 501(c)(3) charity during the year. That $1,000 contribution is not included in the $60,000 of expenses. Instead, it’s shown on the K-1 Joe receives from the corporation.
On his personal return, Joe will claim $40,000 of pass-through income from the corporation ($100,000 income minus $60,000 of expenses). The $1,000 of charitable contributions will be taken as an itemized deduction on Joe’s return, if he has enough other deductions to itemize.
Why is This a Big Deal?
A deduction allowed at the corporate level results in less income being passed through to the shareholder(s). This reduces the shareholder’s adjusted gross income, which is key for many calculations on a personal tax return.
Charitable contributions in an S-corp don’t reduce a shareholder’s AGI; instead the contributions are taken as an itemized deduction. If the shareholder takes the standard deduction instead of itemizing, they receive no tax benefit at all from the charitable contribution.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”