The tax treatment of charitable contributions made by an S-corporation is something that clients sometimes question. Here’s a brief overview.
Short and Sweet Version
Here’s the basic rule: if an S-corp makes a charitable contribution, the contribution is not deductible on the S-corp tax return, but is instead taken as a deduction by the corporation’s shareholder(s).
Joe the Window Washer is the sole shareholder of his S-corporation. The corporation’s gross income was $100,000, and deductible expenses totaled $60,000. The corporation also made a $1,000 contribution to a 501(c)(3) charity during the year. That $1,000 contribution is not included in the $60,000 of expenses. Instead, it’s shown on the K-1 Joe receives from the corporation.
On his personal return, Joe will claim $40,000 of pass-through income from the corporation ($100,000 income minus $60,000 of expenses). The $1,000 of charitable contributions will be taken as an itemized deduction on Joe’s return, if he has enough other deductions to itemize.
Why is This a Big Deal?
A deduction allowed at the corporate level results in less income being passed through to the shareholder(s). This reduces the shareholder’s adjusted gross income, which is key for many calculations on a personal tax return.
Charitable contributions in an S-corp don’t reduce a shareholder’s AGI; instead the contributions are taken as an itemized deduction. If the shareholder takes the standard deduction instead of itemizing, they receive no tax benefit at all from the charitable contribution.