New Tax Rules Make Giving to Charity Harder for Businesses

What Changed?

Starting January 2026, the One Big Beautiful Bill Act (OBBBA) tightens the reins on corporate charitable donations. What once provided dollar-for-dollar tax relief may now offer only a fraction—or nothing at all.

The New Limits

The act imposes two key restrictions on deductions:

A 1% "floor" – Only donations exceeding 1% of taxable income qualify.
A 10% cap – The maximum deduction is capped at 10% of taxable income.

Example: A company with $1 million in taxable income can deduct:

Up to $10,000 (1% floor) only if the donation meets the threshold.
Maximum $100,000 (10% cap), with any excess carried forward—but subject to the same constraints.

The Pass-Through Dilemma

For S-Corporations, partnerships, and LLCs, the impact is even sharper. Owners report donations on K-1 forms, but if they already take the standard deduction, only 1% of their share may be deductible. The rest? Lost permanently.

The Strategic Workaround: Section 162

Businesses can bypass OBBBA’s limits by reclassifying payments as ordinary business expenses under Section 162—but only if they meet strict criteria:

The payment must relate directly to the business (e.g., sponsoring a local event that drives customers).
Documentation must prove a clear financial return (e.g., marketing analytics, customer acquisition data).
No double-dipping: A payment can’t be claimed as both a charitable gift and a business expense.

The Audit Risk

The IRS is cracking down on vague or poorly documented claims. Poor records are the #1 reason deductions get denied. Businesses must maintain: ✔ Explicit business purpose (how the payment benefits the company). ✔ Financial evidence (projections, ROI analysis). ✔ Clear separation from pure philanthropy.

What Should Businesses Do Now?

Audit Current Donation Strategies – Determine which payments still qualify.
Update Agreements & Records – Ensure compliance with Section 162 if reclassifying.
Consult Tax Professionals – Navigate the complexities before the 2026 deadline.

The Bottom Line: The OBBBA forces a tough choice—either restructure charitable giving to preserve tax benefits or face shrinking deductions year after year.