Giving Tuesday is on the horizon! Has your law firm considered how you can support your favorite charities and non-profits this year? Especially during this time of year, many attorneys are searching for meaningful ways to give back to their communities and show support for the causes that matter most to them. It’s an added benefit that charitable giving can help reduce your tax burden, too! Today, we’ll share some of the tax benefits of charitable giving for law firms, address some of the most commonly asked questions, and provide guidance on how to donate and get the tax deductions you’re entitled to for those donations.
Let's start with the basics. How do charitable donations affect taxes?
Charitable donations have the ability to lower your tax burden in a couple of different ways. First, any donations that are given to a 501(c)3 organization are directly tax deductible. However, you need to keep in mind that organizations must have this specialized status in order for you to qualify for these deductions. There are amazing organizations out there that do not have this distinction, and they are no less worthy to support! However, you will not be able to receive a tax deduction for these types of donations. There may also be specific types of tax credits and incentives available in some locations, so check with your CPA during your tax planning meeting to strategize about this!
How much do you get back in taxes for charitable donations?
Rather than getting money back in taxes from charitable donations, any money you donate to organizations simply will not be counted as part of your taxable income. This means that the more you donate, the lower taxes you will pay because of having a lower taxable income. Your outcome will also largely depend on your entity type as well. For example, an S-Corp owner and a sole proprietorship owner may want to use different strategies for their donations to get the best tax advantages. Our advice is to always consult with your tax professional and to provide them with accurate and up to date bookkeeping data so that they can provide the best recommendation possible for your unique situation.
Another option for donating that could be especially beneficial for your law firm is to donate legal services as an in-kind donation. This allows you to deduct the cost of those legal services from your taxable income but does not require you to actually donate money to the organization. This type of donation is especially tax advantaged, but we highly recommend exploring whether this method is approved by your state bar association before taking action on this type of donation.
Can my law firm donate to charity a portion of case profits?
Yes! The decision to allocate a portion of case profits to charity throughout the year or to donate profits from a specific case can be a great way to make a meaningful impact in your community or for a cause that is important to you and your firm. If you choose to take on this commitment, just ensure that you keep good track of your records and document your giving appropriately for tax purposes.
How to report charitable donations on taxes
In order to get the tax deduction you are entitled to for charitable donations, a few conditions must be met. First, you’ll need to keep a record of all charitable donations. Most organizations will automatically send you a letter thanking you for your donation with their tax ID attached. If they do not do this, request that documentation as soon as possible. Make detailed notes about these donations in your accounting system and also plan to provide any supporting documentation to your tax preparer at tax time.
Is there a charitable donations tax deduction limit?
Yes, there are limits that apply to charitable donations that are based on a percentage of your firm’s adjusted gross income. This changes from year to year, so check with your tax professional about what your limits would be for this year. In general, meeting with your tax professional throughout the year is a helpful strategy for making the most out of your donations.
We hope this article has helped you decide on your law firm’s charitable giving strategy for this year! If you need help preparing your books for a meeting with your tax professional, we’d love to support you!
