S Corporation Charitable Deduction Limitation

Unlike C corporations, businesses that are taxed as S corporations don't face taxable-income-related limitations on their charitable donation deductions. Since S corporation shareholders are the ones responsible for reporting and paying the tax on business earnings, they -- not the corporation -- take the deductions for all of the charitable donations the company makes. As a result, the other deduction limitations that do apply can impact each shareholder's return differently.

Donee-Based AGI Limitations

Most tax-exempt charities and other nonprofit organizations are classified as 50-percent-limit or 30-percent-limit organizations. These limits tell S corporation shareholders whether the maximum charitable deduction they can take is equal to 30 percent or 50 percent of their respective adjusted gross incomes, or AGI. Tax-exempt entities -- including such as public charities, nonprofit and public schools, hospitals and churches -- are classified as 50-percent-limit organizations. A small number of entities -- like nonprofit cemeteries, veterans' organizations and fraternal societies -- impose a 30-percent AGI limitation on S corporation shareholders' charitable deductions.

Limitations Related to Property Donations

When S corporations donate property that has appreciated in value, the overall deduction amount is limited to the property's basis, or cost, rather than the property's fair market value. The only exception to this rule is when it's "capital gain property" that is donated. This is property that, if sold, would result in a long-term capital gain, which is the profit on property owned for more than one year. The S corporation can report, and pass on to shareholders, a charitable deduction amount equal to the asset's underlying cost or its fair market value. If fair market value is used, shareholders use a 30-percent AGI limitation for donations to 50-percent-limit organizations and a 20-percent AGI limitation for donations made to 30-percent-limit organizations. When cost basis is used, the regular AGI limitations apply.

Reporting Limitations on Schedule K-1

An S corporation shareholder deducts her share of the business's charitable donations as an itemized expense on Schedule A with her Form 1040. The shareholder will know how much to deduct after she receives her Schedule K-1 from the corporation. Schedule K-1s report each shareholder's share of all tax items reported on Form 1120S -- the S corporation information return. For example, suppose the S corporation earns $100,000 in profit and makes a $10,000 cash donation to the American Red Cross, which is a 50-percent-limit organization. If you're one of ten equal shareholders, your K-1 will allocate $10,000 of taxable income and a $1,000 charitable donation to you. For the deductible donations, the K-1 reports the amount as “Other Deductions” along with letter codes that correspond to the appropriate AGI limit to use. If your charitable deductions are ever limited, you have up to five years to deduct the excess.

Basis Reduction in Shareholder Stock

As a result of claiming a charitable deduction for capital gain property at its fair market value, you'll have to reduce your basis in the S corporation stock you own that's equal to your share of the donated property's basis. Therefore, if the S corporation donates stock worth $1,000 that cost it $100 to acquire, your basis reduction is $10, which is 10 percent of the purchase price). Therefore, you may have more taxable gain if you sell your S corporation stock.