While no specific tax deductions exist for sole-proprietors who donate to charity, the individual taxpayer in charge of the sole-proprietorship may claim funds donated to approved organizations on their income tax return. However, for the deduction to count certain other factors, such as the amount of the deduction, may hep you determine whether or not a charitable contribution is the best way to reduce your income tax liability.
Eligible Charitable Contributions
Not every charity meets IRS requirements for a charitable contributions eligible for an income tax deduction. To find out if an organization you are contemplating donating funds to is eligible, search the IRS database of charities online or flip through Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.
Eligible Donations
Only donations of cash or goods with a cash value are deductible. If you donate your time or services to a charity, you cannot deduct the normal hourly wage or contract fee you would be paid for your time.
Taking the Deduction
Charitable donations are taken on Schedule A, Itemized Deductions , underneath the Gifts to Charity heading. Separate lines exist for claiming individual donations of less than $250 and for individual donations that exceed $250. You may also list a donation carryover from a previous tax year. For donations of less than $250, retain your check stub, credit card statement, or a cash receipt for your tax records. If your donation exceeds $250, you must retain a receipt from the charity stating the donation amount and the date of donation.
Standard vs. Itemized Deductions
Deductions for charitable contributions become part of your larger itemized deduction. The average standard deduction for taxpayers who are married, filing jointly tops out at $11,400 as of filing year 2011. Single taxpayers are limited to a $5,700 deduction while head of household filers are eligible for $8,400. Your total itemized deductions should exceed the amount the standard deduction for your charitable contributions to offset your taxable income. It is also important to note that your charitable contributions cannot exceed 50 percent of your adjusted gross income, which may make reaching the level where itemized deductions out value the standard deduction more difficult.
Caution
If you deduct the value of a piece of merchandise donated to a local charity as a promotional cost or “Other deduction” on your Schedule C form, you cannot claim it as a charitable contribution on Schedule A. Business donations should be expensed and removed from your inventory value properly on the Schedule C while items or funds donated by the self-employed person from their business profits should follow the rules outlined above.
If your adjusted gross income is high enough to support charitable donations and other itemized deductions that exceed the standard deduction allowed for your tax filing status, your may see more return than expected when supporting local non-profits and charitable organizations since a reduction in taxable income will reduce your total income tax liability.