New Tax Rules Make Giving to Charity Harder for Businesses

Businesses that donate money will find the rules tougher from January 2026. A new law, called the One Big Beautiful Bill Act (OBBBA), adds limits that cut into how much a company can claim as a tax deduction for charitable gifts. The effect is simple: a donation that once lowered the tax bill dollar for dollar may now give only a fraction of that benefit or none at all. The act introduces a “floor” and keeps the old 10 % cap. For a company with one million dollars in taxable income, the first step is to calculate 1 % of that amount—$10, 000. Any donation below this floor cannot be deducted. The second step applies the 10 % limit, so the maximum deduction is $100, 000. If a company gives more than this, the excess carries over to the next year but must again meet both limits. Companies that give close to the floor can lose a portion of every donation each year, and the loss adds up over time. The problem gets worse for pass‑through entities like S‑Corporations, partnerships, and LLCs taxed as partnerships. These businesses do not take a deduction at the entity level; instead, each owner reports their share on a K‑1 form. If an owner is already using the standard deduction, only 1 % of their share may be deducted as a charitable contribution. The rest is lost, and the result varies widely depending on each owner’s personal tax situation.

One way to keep full deductions is to treat certain payments as ordinary business expenses under Section 162 of the tax code, rather than charitable contributions. If a payment is directly related to the business—such as advertising in a church concert program that attracts customers—it can be deducted entirely. These expenses are not subject to the OBBBA floors or caps, so they preserve the full tax benefit. However, a payment can only be claimed once, either as a charitable contribution or as a business expense, not both. To qualify for the Section 162 treatment, businesses must keep clear records. They should show how the payment connects to their trade or business, provide evidence of expected financial return (like marketing data), and demonstrate that the payment is tied to business performance. Poor documentation is the most common reason for losing this deduction during an audit. Because these rules are already in effect, companies should review their donation programs now. They need to decide whether each payment is better treated as a charitable contribution or a business expense, update agreements and documentation accordingly, and seek professional advice before making changes. By doing so, they can avoid losing valuable tax deductions year after year.

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