While charitable contributions are tax deductible for corporations, the Internal Revenue Service (IRS) does not allow corporations to claim them as business expenses. Instead, they must be identified as an equitable withdrawal on a corporation's income statement.
Corporate Charitable Donations
In Chapter 11 of Publication 535, the IRS prohibits corporations from identifying their charitable contributions as business expenses. The exception to this rule is any cash payments that are made to any organization, including charities, which are not charitable contributions. This refers to payments for services or other fees. Payments made to nonprofit organizations that are not donations should be reported as business expenses.
Reporting Charitable Contributions
In a charitable donation, a corporation gives away part of its income. Because of this, the corporation must include its contribution on any quarterly income statements they produce. An income statement is the document a corporation uses to tell potential and current investors about the company's financial health. These documents show the corporation's net income and are generally relied upon by investors to value the entity's stock.
Corporate Income Statement
On an income statement, the corporation must identify any charitable contribution as an "equity withdrawal." This label states that the donation was taken out of the company's cash or other financial reserves. In doing so, the corporation accounts for the donation's subtraction, thereby explaining why the amount is no longer part of the company's overall operating reserves.
Corporate Tax Return
Like an individual, a corporation can deduct any charitable contributions they make on its tax return. To do so, the corporation must identify the amount of their donation on Form 1120, titled "U.S. Corporate Income Tax Return."
Incorporating Donations on Income Statements
Corporations must account for any donations made within the last business quarter. On an income statement, this information is identified as an equitable withdrawal and subtracted from the company's finances. Seek professional advice from a Certified Public Accountant or licensed attorney who specializes in tax law if you are unsure how to include your charitable donations on your corporation's income statements.