Giving back to society is always a good thing, regardless of the size of your business.
If your business constantly makes donations, you would be no stranger to the joy of giving. Furthermore, you could even benefit from tax deductions. Your accountant will make claiming easy for you.
However, for small businesses, charitable donations can also bring about potential difficulties and headaches. Fortunately, we’ve got your back – get acquainted with the ins and outs of small business donations so you can gear up for tax season. Read on to find out more about charitable donations, and how to record them in your bookkeeping.
Reasons To Give to Charity
The obvious answer would be because of how good it feels to give back to society. Of course, it isn’t always easy to write the cheque, but a sense of satisfaction always sets in when you contribute and make a difference to the community. Furthermore, your small business can enjoy the following benefits:
- Tax deductions: Whether your business is a sole proprietorship, general partnership, or limited partnership, donating can help to decrease your tax liability.
- Better employees and clients: Employees pay attention to organisations that give back. When your employees see you leading the change in giving back, they will feel incentivised in a job with purpose, and could inadvertently help in your recruitment process and retainment of staff.
Similarly, clients could also be attracted to your organisation if they share the same vision. They could also be more willing to shell out more money since the money goes to a good cause.
- Business differentiation: Set your business apart from the competition. While corporate philanthropy is not a new trend, practising it genuinely increases brand loyalty in this do-good renaissance where millennials and Gen-Zs are taught to do social good.
What Is Considered a Donation?
A donation is a gift of money or non-monetary items including property conferred by an organisation on a non-profit charitable, religious, public service, or educational organisation. In donations, the donor receives nothing of value in return.
Is My Donation Tax Deductible?
Only a donation of money is eligible for tax deduction according to the Inland Revenue Department (IRD). Additionally, the donation must be contributed to a charitable institution or trust of a public character, exempt from tax under the Inland Revenue Ordinance’s section 88. You can check for the donation recipient’s eligibility here.
Items that are not eligible for tax deduction include:
- Charity shows admission tickets
- A grave space
- Payments for purchase of raffle tickets or lottery tickets
- Reservation of an ancestral worship space
- Bazaar goods
- Services including saying prayers
Other criteria for tax deductions include:
- The total sum of the taxpayer's donations must not be less than $100
- The allowable deduction in any year is capped at a ceiling of 35% of the taxpayer's assessable income or profits
- The tax deduction for the donation can only be claimed once under salaries tax, profits tax, or personal tax assessment.
- A deduction for the same donation can only be granted to no more than one taxpayer
However, you can claim a tax deduction for any eligible charitable donation made but unclaimed by your spouse.
Stephanie and her husband, Johansson, are living together. The following shows a computation of their Net Chargeable Income for the Year of Assessment 2020/21.
|Stephanie (HKD)||Johansson (HKD)|
|Total approved charitable donations||200,000||1,000|
Calculation of Net Chargeable Income for Stephanie
|Less: Expenses and outgoings||1,000|
|Less: Approved charitable donations*||157,500|
|Less: Basic allowance||100,000|
|Net Chargeable Income||191,500|
Calculation of Net Chargeable Income for Johansson
|Less: Expenses and outgoings||1,000|
|Less: Approved charitable donations**||43,500|
|Less: Basic allowance||100,000|
|Net Chargeable Income||55,500|
*The maximum sum of approved charitable donations allowed for Stephanie is kept at a 35% ceiling, which means that she is only entitled to 35% x HKD 450,000. Since she is staying with her husband, Johansson can claim the remaining $200,000 - $157,500 = HKD 43,5000.
**Johansson can combine Stephanie's unused portion of her approved charitable donations, on top of his own HKD 1,000 donation.
How Do I Record Donations in Bookkeeping?
When making donations, there is no replacement for accurate recordkeeping. Here’s how you can record your donations.
For monetary contributions, you can create a new account specifically for donations. Set up the charitable organisation you are donating to as a new supplier. Every time you donate, record it as a cheque, payment, or bill – the same way you would record any other payments to your supplier.
Subsequently, set up an expense account for your tax-deductible contributions. This account will be reflected on your organisation's income statement.
Ask for an acknowledgement
After donating to your charity of choice, request for an acknowledgement letter and keep detailed records for your bookkeeping. The documentation can be in the form of
- A written communication (such as email) or receipt from the charitable organisation that indicates the organisation's name, along with the date of the contribution and sum of donation
- A bank record reflecting the name of the charitable organisation, the sum of donation, as well as the date of donation. Bank records may include bank statements, electronic funds transfer receipts, cancelled checks, and credit card statements
How Do I Track My Donations?
Tracking your donations is important, especially when it comes to tax season. If you don't form the habit of tracking your contributions, it can be difficult to remember the date and amount you have donated. Keeping track of your donations allows you to stay on top of things, so you don't have to scramble around to file your taxes.
Here are some ways you can track your donations:
- Outsource: Free yourself from the paperwork — let Osome automate your invoices, reconcile your donations, and prepare books for accounting reports.
- Traditional way: Go old school by simply recording your contributions with pen and paper. However, you may wish to keep a backup copy just in case you lose the original copy, or accidentally spill beverages on it.
- Digitise your documents: Scan all your documents and receipts, then upload them into one folder for your ease of reference. You can effortlessly tally everything during tax season in this way.
- Utilise spreadsheets: Organise and keep track of your donations with spreadsheets including Google Sheets or Microsoft Excel. Form the habit of recording a contribution every time you donate, so you can easily trace things.
What charity organisations can I donate to?
World Vision Hong Kong is a Christian humanitarian organisation that aims to change the lives of communities, families, and children in need through donations from donors.
Receipts are issued for all contributions for the tax deduction, and regular contributors will also get an annual donation receipt from World Vision Hong Kong by the end of April each year.
Charitable Choice is a trusted charity that supports innovative and interactive online giving. They allow people to set up a fundraising campaign, gift someone else a donation for them to choose their preferred charities to support, or contribute to multiple charities in a single transaction.
All donations on the platform are tax deductible.
The Hummingfish Foundation is a non-profit charitable organisation dependent on financial support from individuals and corporations.
They are a registered tax-exempt charitable organisation.
From disaster relief and preparedness, special education and rehabilitation service, community health service and education, to humanitarian participation and education, Hong Kong Red Cross does it all.
You can show your support by donating. Additionally, Hong Kong Red Cross is an approved charitable institution eligible for your tax deduction.
Paperwork Doesn’t Have To Be a Pain
Your business can make a great difference to the community by donating, but the paperwork requirement isn’t always a walk in the park.
Bookkeeping can be tedious, especially when it comes to recording your donations. Fortunately, you don’t have to do everything by yourself!
Free yourself from pesky admin with Osome’s bookkeeping services. From generating invoices, recording financial transactions, posting debits and credits, keeping and balancing current accounts, to completing payroll, our experts can do it on your behalf. Need additional advice? Simply drop our experts a message via our app at any time of the day, and they will get back to you in no time.
Try it out for yourself – schedule a call with us today!