Accounting & Bookkeeping & Small Business Forum

[dp1903]

Being a member of the Quickbooks forums, I've noticed that two different ProAdvisers have recently advised members on that forum how to "expense" charitable contributions. Being that the QB forum is mainly for legal entities other than C Corporations, does anyone else see something wrong with this picture?

For sole proprietorships, LLCs operating as sole proprietorships, partnerships, and Sub S Corps, charitable contributions are not a legal business expense under federal law. They are equity withdrawals from the business. For some reason it seems some well trained people, as well as many in business for themselves don't know this. I just wanted to let anyone know that might not have been aware of this.

Charitable contributions can be deducted on Schedule A, Form 1040, as an itemized deduction, but not as a business expense, unless you are a C Corp.

http://www.irs.gov/publications/p535/ch11.html#d0e8853

"Charitable contributions. Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts. If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. See the Instructions for Form 1120 for more information. Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040)."

[trarob]

Could they possibly been giving advice for the person on how to get additional deductions, not necessarily related to business deductions. I have made replies to individuals who are seeking ways in which they can get more deductions (business or individual) and I always mention Charitable Contributions as a means for individuals. That's not saying I'm telling them to expense Charitable Contributions as a business expense. If the question was general, then the advisor may have given a general response vs. if the question specifically asked about business expenses. Just throwing it out there because I have seen many posts where the question is a general question so they get a general answer and it's up to them to ensure they are having their taxes properly filed. :D

[dp1903]

Well, you tell me, how would you interpret this question?

Quote: How can I account for Charitable contributions of the business in Quickbooks?

The reply explained how to do it, naming the expense account "Charitable Contributions Expense". I don't think there is any ambiguity.

True, it is up to the owner to get his taxes done right, but I wouldn't appreciate someone telling me how to do something illegal. I would want them to be straight up with me so I didn't get myself into potentially hot water.

[trarob]

I would say that question is specific. I didn't know the question prior to answering which is why I mentioned that the advice given depends on how the question is asked, general or specific.

They can keep the account name as Charitable Contributions Expense, but they should sub it under the Owner's Draw. This would allow them to keep the Owner's Draw organized and easily see how much has been paid as charitable. I have clients that I have sub accounts under their Owner's Draw so they can easily pull up info on those accounts.

I agree I wouldn't want someone to tell me wrong information, but you have to take the advice on these forums at surface level and realize not everyone is going to be the best one to get advice from. Since you don't know the persons you don't know who is knowledgeable and who is not. Anyone asking questions and getting answers on forums should always seek additional advice or research the info given. I look at the forums as simply a means for getting a direction to something, but not the final answer. The direction might be wrong which is why they have to do additional research. I don't think the IRS Auditor would care one way or another if you get right or wrong advice from a forum. It's ultimately up to you to determine the final answer and way you will handle the situation.

[dp1903]

I received a reply from one of the ProAdvisers and I see where they are coming from now. It is assumed that the business owner's tax professional will apply the "Charitable Expense" as an itemized deduction on the personal return and not put it on the business return. I see nothing wrong with showing charitable contributions as a business expense no matter what type of entity you own as long as they are accounted for properly on the tax return. However, I personally believe that anything which is not business or profit oriented, but pure charity, should not be part of a business's books and would be properly accounted for as you say, under Owner's Equity.

Now I understand why a prior boss wanted his charitable contributions to show up on the books. But, I don't think he ever understood that they didn't count for his business even though I told him a 100 times.

[dp1903]

I've learned something that I hadn't seen before in regards to this. Charitable contributions, though not deductible for any business but a C Corp, may be given to promote goodwill in the community and can indirectly influence sales of the business. In this light, it is reasonable to me to show such contributions as business expenses, even though they are not tax deductible as a business expense. I don't know why I hadn't figured this out before, just had blinders on I guess. I've gone back to my accounting books and see where Arthur Andersen themselves had an expense called "Contributions and civic activities" on their income statement and my intermediate accounting book speaks of charitable contributions in the second chapter. So, I stand corrected with my original post. I see nothing wrong with having such contributions shown on the income statement as long as they pertain to, the motive for giving them is, promoting a business' goodwill within the community.

[Ahshucks]

Rather than Contribution expense, might it then be Advertising Expense? You picking up on my clue here ...

[dp1903]

I would not want to face the IRS with expenses I had deducted for advertising which were given to charities as a "gift" with no strings attached. No matter what the purpose for me making the "gift", I think the IRS would disallow the deductions, declaring them charitable contributions rather than advertising expense.

GAAP and Tax accounting have different purposes. Under GAAP I see it as appropriate to classify such charitable contributions as expenses if the purpose is to promote general business goodwill among the community. However, as I stated already, Arthur Andersen classified these expenses as charity, not as advertising expense. There are other legitimate business expenses under GAAP that are only partially deductible under the tax code. Meals and entertainment is one example. In addition, if you travel to another city during a business day, conduct business, and return the same day then meals are not deductible under the tax code but really are a legitimate GAAP business expense. So, there are legitimate business expenses which are not tax deductible and I see charitable contribtuions as one of these.

[Richard Noot]

dp1903 wrote: I would not want to face the IRS with expenses I had deducted for advertising which were given to charities as a "gift" with no strings attached. No matter what the purpose for me making the "gift", I think the IRS would disallow the deductions, declaring them charitable contributions rather than advertising expense.

GAAP and Tax accounting have different purposes. Under GAAP I see it as appropriate to classify such charitable contributions as expenses if the purpose is to promote general business goodwill among the community. However, as I stated already, Arthur Andersen classified these expenses as charity, not as advertising expense. There are other legitimate business expenses under GAAP that are only partially deductible under the tax code. Meals and entertainment is one example. In addition, if you travel to another city during a business day, conduct business, and return the same day then meals are not deductible under the tax code but really are a legitimate GAAP business expense. So, there are legitimate business expenses which are not tax deductible and I see charitable contribtuions as one of these. I am not sure what GAAP has to do with this discussiopn especially since the vast majority of small businesses do not use the accrual basis of accounting. Also, the deductibility of meals for tax purposes does not require that you be out of town for more than one day. As far as your statement that the IRS would consider these expenses charitable deductions I find interesting since to be a charitable deduction the organiztion must give a statement no later than the filing of a tax return that no tangible benefits were received by the donor.

[dp1903]

Quote: I am not sure what GAAP has to do with this discussiopn especially since the vast majority of small businesses do not use the accrual basis of accounting. Also, the deductibility of meals for tax purposes does not require that you be out of town for more than one day. As far as your statement that the IRS would consider these expenses charitable deductions I find interesting since to be a charitable deduction the organiztion must give a statement no later than the filing of a tax return that no tangible benefits were received by the donor.

First of all, cash basis accounting is not reliable to determine any business's real income and expenses on a calendar or fiscal year basis. If you want to remain in business and be profitable I would not recommend using cash basis or modified cash basis financial statements to help run your business, set product or service prices, or determine your break even point. In addition, if you need a loan from a bank I doubt that the bank is going to accept cash basis financial statements as proof of profitability, cash flow, etc. I certainly wouldn't. They're going to want to see your receivables, payables, and any other accrued income and liabilities. Keeping your books using the accrual method and keeping worksheets to reconcile your books with your tax return is what I would recommend for most businesses of any size. There are exceptions, but examples of what I am speaking of would be small retail, service, and manufacturing businesses, with more than 2 or 3 employees and revenues exceeding $150,000 to $200,000.

The company I worked for a couple of years ago had annual revenues from $400,000 to $550,000. It was a small wholesale/retail western boot company. It reported on cash basis for tax purposes. The last quarter of the year was their busy time of year. In November and December the company had accrual sales of $100,000 or more. In January of the next year, as an example, we would receive about $80,000 in cash from previous months' sales, but actual accrual sales for that month were only $15,000 to $20,000. What does GAAP have to do with this discussion? Isn't it obvious? On a GAAP basis our sales for January would be $15,000 to $20,000. On a cash basis our sales would be $80,000.

Besides inaccurately measuring revenue, other examples of how cash basis accounting misrepresents real revenues/expenses would be paying for 12 months of insurance in one year for tax purposes, using tax or accelerated depreciation for large expenditures of long lived assets, and recording other expenditures, which have a temporary or permanent difference in how they are recorded for financial and tax accounting, for tax purposes only. The end result is that you will distort and in many cases materially misrepresent actual income and expenses. In doing so you run the risk of inaccurate pricing for your products and services which can have significant consequences in whether your business becomes profitable or goes belly up. In addition, on cash basis, your profit margin and expenses as a percentage of sales will be plain wrong. How do you expect to manage a business with such bad data coming from your accounting system? You can't. That is what GAAP has to do with small businesses who use the cash basis method for tax reporting.

As far as meals being tax deductible while traveling, what I said is accurate. Pub 463: Travel, Entertainment, Gift, and Car Expenses states on page 5 under "Meals", "You can deduct the cost of meals in either of the following situations: (1) It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business, or (2) The meal is business-related entertainment."

If you travel to another city during the day to conduct business, eat one or more meals there, and then return home the same day without the need for rest or sleep then the meal expense is not tax deductible even though it maybe considered a legitimate business expense for financial accounting purposes.

In regards to the charitable contributions, I have no clue what you are trying to say. The assumption was that the contributions met all IRS guidelines for deductibility as a personal itemized deduction. No services or products are received when a contribution is made as a "gift". Implied in the term "gift" is that no performance is required by the other party, i.e. no tangible benefits are received by the donor. Therefore, it would not be wise to classify such "gifts" as advertising expense and tax deductible, unless you don't mind being audited and paying back taxes with interest and penalty. :D

[Richard Noot]

The reason that GAAP has nothing to do with the discussion is simple. There is no requirement that a taxpayer be on a cash or accrual basis to take a charitable contribution

Your original post stated that a taxpayer had to be out of town overnight which is not entirely correct. You later gave a more complete answer

Cash contributions are not deductible without a receipt from the charity.

Check contributions of over $250.00 are deductible only if the charity gives a receipt no later than the earlier of the due date of the tax return or the date of filing of the tax return. In addition this receipt must state that no tangible benefit was received by the donor. Just recently the tax court sided with the IRS on this very issue. The tax court stated that there was no doubt that the amount claimed as a contribution was donated. However the letter from the charity was given after the taxpayer filed his/her return. The court stated that even if the statement was timely given to the taxpayer the court still would have denied the deduction. The reason was that the statement just listed the date and amount of contributions. THERE WAS NO STATEMENT ON THE LETTER THAT STATED THE DONOR RECEIVED NO TANGIBLE BENEFIT.

[dp1903]

Quote: I am not sure what GAAP has to do with this discussiopn especially since the vast majority of small businesses do not use the accrual basis of accounting.

I was answering your comment on what GAAP has to do with businesses which use the cash or modified cash basis of accounting. One of the main reasons the business I "use" to work for is now out of business, went belly up, is because they wouldn't heed my advice. They thought QuickBooks and accounting was simply so they could file their taxes. They had no concept of how important accrual accounting is for the proper measurement of revenue, expenses etc. and how the financial statements and accounting system can be utilized as instruments to safely guide and manage a business, make it profitable and keep it profitable.

Quote: Meals and entertainment is one example. In addition, if you travel to another city during a business day, conduct business, and return the same day then meals are not deductible under the tax code

My statement is correct. I mentioned nothing of getting rest or the need for it. The assumption is that you did not need rest, and, therefore, the meal expense would not be deductible at all.

In regards to classifying the charitable gifts as contributions on the business's books, I was only referencing them as relating to the business, not of taking them as personal itemized deductions. My reference was of classifying the gifts as "advertising expenses" and deducting them on the business return as being unwise. The assumption was that the gifts met the IRS requirements for deducting them as itemized deductions. Geez! But thanks for explaining the requirements in order to declare them itemized deductions