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State Annual Filings and Franchise Taxes

In addition to paying state and local income taxes on the earnings from your business, franchise taxes may also be imposed by the state or local government in the jurisdiction you live or are conducting business in. State franchise taxes can be viewed as fee for the right to conduct business in a state. Franchise taxes are usually paid as part of a required annual or bi annual informational report / filing, however, practice can vary by state. While these "privilege taxes" may not make business owners happy, the good news is that the IRS allows you to deduct state franchise taxes when you prepare your federal tax return.


REAL ESTATE AGENT

Rachel Realtor attends a charity golf tournament organized by her newest client, the cost to play is $400 and she purchases $300 of raffle tickets while at the event. Assuming it would normally cost $200 for a tee time and food and drinks on the course, Rachel could deduct $200 on her Schedule A. Note that the raffle tickets she purchased are non-deductible and no deduction is included on her Schedule C.

ENTREPRENEUR

Bob is a freelance Architect whose business took off last year. Bob has been saving for a while and always wanted to give back so he decides to donate $75,000 to his favorite charity. Last year Bob's AGI was $130,000. Unfortunately, only $65,000 of his cash donation to his favorite 50% qualifying charity is deductible, the remaining $10,000 of his donation will only benefit his heart and not his wallet. The following year, Bob had the same AGI so his charitable contributions were still limited to $65 thousand. He donated another $20 thousand to the same organization. When Bob prepares his tax return, he will be able to deduct $20 thousand for his current year donation, and then $10,000 for the donation that was disallowed in the prior year, since charitable deductions exceeding the AGI limitation can be carried forward for five years (and deducted after current year contributions up to the AGI limit).

LANDLORD / AIRBNB HOST

The owner of a beach front rental property allows his temple to host a black tie event at his rental. If the fair market value of the rental property for one night is $1,500 the host could complete Form 8283 and deduct the $1,500 fair market value of his donation on his Schedule A when he files his taxes at the end of the year (provided he properly documents his donation and it is within his AGI limitations).

COURIER

Dillon is a driver for Instacart who in March delivered food to a local charity that needed groceries for an event in short order. Dillon was inspired so he donated $200 the next day. A few weeks later when Dillon was preparing his tax return he tried to deduct his recent contribution. Dillon’s accountant informed him that since the contribution was not made until March of the current year, he would not be able to take the deduction until next April (occasionally the IRS may make specific exceptions to this rule).


INFORMATION ON DEDUCTING CHARITABLE DONATIONS

  • If you made a donation and received a benefit (food, entertainment, etc.) your deduction may be limited to the amount exceeding fair market value the benefits you received. Additionally, certain charitable contributions where sponsorship placements are provided could be considered advertising expenses (deduct on Schedule C) if the purpose of your donation is to promote your business.
  • If you are donating property to a charity your property must be classified as either ordinary income property (inventory, creative works, etc.), in which case you would deduct the value of your basis in the property; or capital gain property (art, land, etc.), in which case you would deduct fair market value of the property. The rules for donating property to charity are complicated to you should speak with your accountant to determine how to treat your specific property donation.
  • If your donation of time, cash or property requires that you travel you may be able to deduct your meals, transportation and accommodation expenses. Your vehicle expenses can be deducted at a standard rate of $.14 per mile (2014) or by deducting actual vehicle expenses.
  • The following are a few examples of charitable contributions you cannot deduct: The value of your time, cost of raffle tickets, dues / fees, donations to individuals, donations most foreign organizations, contributions homeowners' associations, donations to political groups or candidates, and contributions labor unions and social clubs.
  • If you make a cash donation over $250, to claim your deduction you will need either bank records or written acknowledgement of your contribution amount from the benefiting charity. If you make a non-cash donation, to claim your deduction you will need to have a record of the property you donated including a description of the property, the fair market value of the property (and how it was valued), what you paid for the property, who you donated it to and the date you made your donation.

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