The new year is always a good time to give back to society, and many businesses start thinking about charitable donations. However, this begs the question – how do you keep track of your donations, especially if you make them throughout the year? It's crucial to have a bookkeeping system for your business to track your charitable donations so you don't miss out on a single deduction.
What Is Considered a Donation?
A charitable donation is an asset of property or cash given to a non-profit organisation to help it to accomplish its objectives, for which the donor obtains nothing of value in return. Should the non-profit organisation qualify, the donor can record the market value of the donation as a tax deduction. The recipient documents the received asset at its fair market value.
Each of the different business structures in the United Kingdom has a different set of rules when it comes to giving to charity.
For a limited company, you can pay less Corporation Tax when you donate the following to charity:
- property, land, or shares in another company (your own company shares do not qualify)
- sponsorship payments to a charity
- trading stock or equipment (items your company makes or sells)
- employees (on secondment) when:
- your employee uses the time for volunteering
- your company transfers an employee to work for a charity for the time being (also referred to as a ‘secondment’)
Sole traders and partnerships
Donations made by individuals to community amateur sports clubs (CASCs) or charity are tax free, meaning they’re applicable for tax relief. The tax goes to the charity or to you, depending on the way you donate:
- in your will
- property, land, or shares
- directly from your pension or wages through a Payroll Giving scheme
- through Gift Aid
Recording Donation of Goods or Services, and Cash
Recording a donation of goods or services that you sell will be different from recording a cash donation.
Donation of goods or services you sell
Work out the value of your contributed assets
If you’re donating goods or services that you sell, you’ll first have to establish the fair market value of the assets you’re contributing to the charity; in other words, what someone would be willing to pay for them in the open market.
Create an invoice to the charity organisation
Create an invoice to the charity for the goods or services that you donated. To jot down the expense, set up an expense account for donations. Then, create an entry in your accounting system to represent the goods or services that were donated. This can be defined as a ‘charitable contribution’.
Issue the charity organisation a credit memo
Issue a credit memo to your charity organisation as a customer. This will cancel out the invoice that you sent to the entity, and show the amount that you donated. Finally, make sure that the credit was properly applied to the invoice.
To donate cash, you can set up the charitable organisation you’re donating to as a new vendor for your company. Then, record this donation as a cheque or a bill in the charity’s name and the corresponding payment, just as you would for any other bill.
Next, set up an expense account as a dedicated account for tax-deductible contributions. This account will be reflected on the company's income statement.
Request an acknowledgement
Regardless of whether you made a donation of goods, services or cash, you should request an acknowledgment letter from the charity organisation to keep along with your other donation records.
How To Keep Track of Donations
You’ll need to have a record of your donations if you want to take them off your total taxable income. When tax season comes around, it’s sometimes challenging to remember when and how much you’ve donated. Keeping track of your charitable contributions throughout the year prevents a last-minute search for evidence and lets you stay on top of how much you’re spending on donations.
To keep track of your donations, you can experiment with different ways until you find a system that works for you. Always remember to keep the documents and receipts in a safe place so you can get to them easily during tax season. There are various ways you can keep track of your donations:
- digitise them: scan every document and receipt and keep them neatly in a folder on your computer. When tax season arrives, you can easily refer to all the accumulated documents
- use spreadsheets: if you’re already in the habit of using spreadsheets, such as Google Sheets or Microsoft Excel, you can create one for charitable donations
- outsource them: Osome handles your bookkeeping for you, including the reconciliation of donations
- use an app: if you’re tech savvy, you can use phone apps to give directly from your phone and keep track of how much you’ve donated. With all your donations stored in one place, you won't run the risk of forgetting a receipt here or there. Here are our top three app picks:
- Kindred: this social enterprise was created to encourage charitable donations through everyday purchases, supporting more than 20,000 charities and causes. With more than 30,000 brands on its website and extension, shoppers can shop online, enjoy offers, get cashback and donate a percentage of that cashback to a charity of choice
- Sustainably: supporting more than 40 charities,such as British Heart Foundation, The Rainforest Trust, Macmillan, Social Bite and Shelter, Sustainably allows people to donate to their chosen cause by rounding up cashless transactions and giving spare change automatically every time consumers shop. Sustainably also takes care of Gift Aid automatically
- Pledjar: when a shopper makes a purchase on the Pledjar app, Pledjar automatically rounds it up to the nearest pound. At the end of every week, the shopper can donate their accumulated round-ups to their chosen cause. Additionally, Pledjar helps with Gift Aid processing by passing on 100% of the charitable contribution so Gift Aid can be charged on all of it, before charging 10% of the original amount.
Take the Stress out of Taxes
Taxes don't have to be taxing. Leave it to us at Osome -- we take over your paperwork, cross check data, and submit annual reports neatly. You will also have a dedicated Chartered Accountant to help pay your tax smartly and respond swiftly when you have queries.
We got your accounting under control, so you can focus on what’s really important: growing your business.