Deducting corporate charitable contributions

A corporation’s annual charitable contribution deduction cannot exceed 10% of the corporation’s taxable income Sec. 170(b)(2)(A)), computed without regard to the following (Sec. 170(b)(2)(D)):

• The charitable contribution itself;
• The corporate dividends-received deduction;
• Deduction of the premium on repurchase of convertible debt (Sec. 249);
• Any net operating loss carryback to the year (Sec. 172);
• Any capital loss carryback to the year (Sec. 1212(a)(1)); and
• Specified agricultural and horticultural cooperative payments (Sec. 199A(g)).

Law change: As part of H.R. 1, P.L. 119–21, known as the One Big Beautiful Bill Act (OBBBA), for tax years beginning on or after Dec. 31, 2025, the allowable portion of a corporation’s charitable contribution deduction is that which exceeds 1% of the corporation’s taxable income for the tax year and does not exceed 10% of the corporation’s taxable income for the tax year (Sec. 170(b)(2)(A), as amended by the OBBBA).

The donee must qualify as an organization described in Sec. 170(c) at the time of the contribution in order for the donor to qualify for a charitable deduction. Donors can check the status of such organizations at irs.gov by entering the search term “TEOS” (for Tax Exempt Organization Search). Contributions made to a qualified organization by donors unaware of a change to an unqualified status generally will be allowable as a deduction if made on or before the date of an appropriate public announcement stating that the organization ceases to qualify (Rev. Proc. 2018–32). An appropriate public announcement is generally one published in the Internal Revenue Bulletin or on the IRS website. The most recent list of organizations whose tax–exempt status has been revoked can be found by searching for “Revocations of 501(c)(3) Determinations” at irs.gov.

Contributions exceeding the annual 10% limit are eligible for carryforward to the next five tax years; no carryback is permitted (Sec. 170(d)(2)). Current–year contributions in those future years, however, are deducted (up to the applicable limitation for the type of contribution in the future year) before carryover contributions, and the total charitable deduction (including current–year and carryover contributions combined) is limited to the excess of the 10% limitation over the current–year contributions deducted according to their applicable limitations (Sec. 170(d)(2)(A)). Any carryforward not fully used by the end of the five–year period expires with no benefit to the taxpayer.

Law change: Under the OBBBA, for tax years beginning on or after Dec. 31, 2025, the portion of charitable contributions that fall below the 1% floor mentioned above that cannot be deducted in the current year may be carried forward for up to five years, but only to tax years in which the corporation’s total charitable contributions exceed the 10% taxable income limitation.

Leave-based donation programs 

A leave–based donation program is an employer–sponsored program whereby employees agree to not use their accumulated leave (e.g., vacation, sick, or paid–time–off hours) in exchange for the employer making a cash donation equal to the gross value of the accumulated leave to a charitable organization. Generally, the value of the leave is compensation income to the employee and a compensation deduction for the employer (even though the funds are sent to a charitable organization) (Regs. Sec. 1.61–2(c)). However, the IRS can designate that cash payments an employer makes to Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo are not considered income or wages to the employees.

Donations of property

When property rather than cash is donated, the general rule is that the deductible amount of the donation is the fair market value (FMV) of the property. There are, however, many exceptions to this general rule. Sec. 170(e) distinguishes between contributions of property yielding long–term capital gain if sold by the corporation (capital gain property) and property yielding short–term capital gain or ordinary income if sold. It also limits deductions for certain types of long–term capital gain property.

When property that would not generate long–term capital gain if sold (recapture, short–term capital gain property, inventory, etc.) is contributed, the deduction otherwise available is reduced by the amount of ordinary income or short–term capital gain that would have been generated if the property had been sold (Sec. 170(e)(1)(A)). In such cases, the amount of the deduction is generally limited to the corporation’s tax basis in the contributed property, with certain exceptions.

Generally, if long–term capital gain property is contributed, the corporation can deduct the FMV of the property. While stock usually qualifies as long–term capital gain property, it is ordinary–income property if:

• It is held for one year or less; or
• Even if held more than one year, gain on its disposition would not be capital gain because the stock is (1) preferred stock received by the donor in a nontaxable transaction; (2) collapsible corporation stock; or (3) stock in a foreign corporation in which the donor owns 10% or more of the combined voting power of all classes of stock (Regs. Sec. 1.170A-4(b)(1)).

If all of the appreciated stock of a taxable corporation is donated to a charity (or other tax–exempt organization) that then liquidates the corporation, the liquidating corporation is taxed under Sec. 337(b)(2) as if all of the assets were sold at their FMVs. Gain is also recognized if a taxable corporation makes a charitable donation of all, or substantially all, of its assets to one or more tax–exempt organizations (Regs. Sec. 1.337(d)-4(a)(1)). Losses may be disallowed under Regs. Sec. 1.337(d)-4(d) or limited under Sec. 336(d)(2), and the related–party loss limitations under Sec. 267 also apply. A taxable corporation that converts to a tax-exempt entity is also treated as contributing all of its assets to a tax–exempt entity and thus triggers any liquidation gain under Regs. Sec. 1.337(d)-4(a)(2).

In the following instances, the charitable contribution deduction is limited to the taxpayer’s tax basis in the property:

• When tangible personal property is contributed and its use by the donee organization is not related to the purpose or function constituting the basis for its tax-exempt status;
• When the property is donated to or for the use of certain private foundations, as defined in Sec. 509(a). An exception to this rule allows a deduction at FMV for contributions of appreciated stock for which market quotations are readily available (Sec. 170(e)(5)); and
• When the donated property is intellectual property, such as a patent, copyright (other than those created by the taxpayer), trademark, trade name, trade secret, know-how, software (other than software that is readily available for purchase by the public), or similar property (Sec. 170(e)(1)(B)).

Recordkeeping and substantiation requirements

Recordkeeping requirements are imposed on corporations making charitable contributions of property. Such documentation will be important if the IRS audits the corporation and requests verification of the deduction taken for charitable contributions. Without such documentation, the claimed deduction may be denied. The regulations require more extensive documentation for contributions of property than for contributions of cash. The extent of the documentation depends upon the nature and value of the donated property and the nature of the donor.

Rules for substantiation of corporate charitable contributions

• Taxpayers making a qualified conservation contribution and claiming a deduction must maintain written records of the FMV of the underlying property before and after the donation and the conservation purpose furthered by the donation, and such information shall be stated in the taxpayer’s income tax return if required by the return or its instructions (Regs. Sec. 1.170A-14(i)).
• A monetary gift includes a transfer of a gift card redeemable for cash, as well as a payment made by credit card, electronic fund transfer, online payment service, or payroll deduction. The substantiation for such a donation could be a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement. Written records would include printed email correspondence (Regs. Sec. 1.170A-15(b)).
• The need to obtain and retain a bank record or written communication does not apply to transfers to a charitable remainder annuity trust or a charitable remainder unitrust (Regs. Secs. 1.170A-15(g) and (e)).
• Donors that make contributions of $250 or more, but not more than $500, need only obtain a contemporaneous written acknowledgment from the donee (Regs. Sec. 1.170A-16(b)).
• Noncash contributions of more than $500 require completion of Form 8283, Noncash Charitable Contributions (Regs. Sec. 1.170A-16(c)).
• The substantiation required for the year a contribution is deducted (appraisal, signed Form 8283, etc.) must also be submitted with the return for a carryover year (Regs. Secs. 1.170A-16(c) through (f)).
• An organization, such as the Combined Federal Campaign or United Way, that distributes the amount received to one or more other charitable organizations is still treated as the donee for purposes of the substantiation rules (Regs. Sec. 1.170A-15(d)(2)).
• Noncash contributions of more than $5,000 must be substantiated by a qualified appraisal (Sec. 170(f)(11); Regs. Sec. 1.170A-17).

For cash contributions of less than $250, the corporation must maintain a copy of the canceled check or other evidence, such as a receipt or other acknowledgment by the donee (Regs. Secs. 1.170A–13(a) and 1.170A–15(a)). If the evidence is in the form of a receipt from the donee, the receipt should show the donee’s name and the date and amount of the contribution. In the absence of either a canceled check or receipt, the taxpayer can rely upon other written records showing the donee’s name as well as the date and amount of the contribution. However, the regulations indicate the reliability of such other written records is to be determined on a case–by–case basis, with the burden of proof being on the taxpayer (Regs. Sec. 1.170A–13(a)(2)(i)). Therefore, if at all possible, the corporation should maintain a copy of the canceled check or a properly documented receipt.

There are more stringent substantiation requirements for cash donations of $250 or more (Sec. 170(f)(8)). The regulations state that contributions of $250 or more are not deductible unless a contemporaneous written acknowledgment is obtained from the donee (Regs. Sec. 1.170A–13(f)). A canceled check or other reliable records are not sufficient proof. The acknowledgment can be made on paper or an email addressed to the donor. While the acknowledgment is not required to follow any particular format, the following information must be included:

• The name of the organization;
• The date of the contribution;
• The amount of cash donated;
• A statement concerning whether the charity provided any goods or services in return for the donation; and
• A description and good-faith estimate of the value of any goods or services provided. If the goods or services consist solely of intangible religious benefits, a statement to that effect is sufficient.

The Sec. 170(f)(8) substantiation requirements for cash contributions also apply to contributions of property of $٢٥٠ or more. The written–acknowledgment requirements are the same as for cash contributions of $250 or more. In addition, corporations must simultaneously meet additional requirements outlined in the regulations. For property contributions with a value in excess of $500 and up to and including $5,000 per item or groups of similar items, further documentation is required. This includes a description of how the property was acquired (e.g., by purchase or manufacture) and the date it was acquired or, if manufactured by the taxpayer, the date it was substantially completed. For property other than publicly traded securities, the cost or other basis of the property, if it was held by the taxpayer for less than 12 months, must also be provided (Regs. Sec. 1.170A–13(b)(3)). For contributions of property exceeding $5,000, all corporations must obtain a qualified appraisal of the property and attach to their tax return for the year of the contribution information concerning the property and the appraisal as the IRS requires (Sec. 170(f)(11)).

Contributor

Shannon Christensen, J.D., MBT, is an executive editor with Thomson Reuters Checkpoint. For more information about this column, contact thetaxadviser@aicpa.org. This case study has been adapted from
Checkpoint Tax Planning and Advisory Guide’s C Corporations topic. Published by Thomson Reuters, Frisco, Texas, 2025 (800-431-9025; tax.thomsonreuters.com).