Salons are frequently hit up by local charities' fund-raising events for donated gift baskets, gift cards or even cash donations. And, many owners eagerly agree, automatically thinking that donations of product, time or money is tax deductible. But Larry Kopsa, partner at Kopsa Otte CPAs and Advisors which specializes in and salon and spa tax planning, says the issue is more confusing than that, and many owners may be unpleasantly surprised come tax time. Let’s look at the different scenarios:
Donations of Gift Baskets: “Let’s say you are prepared to donate a basket of products that you would have sold in the salon for $300,” says Kopsa. “First, let’s say you paid $150 for those products, and you’ve already deducted that cost when you purchased them from your distributor--you can’t deduct that again. You may have made $150 when you sold those products, but you can’t deduct income you actually didn’t make—so you can’t deduct the $150 that you would have made.”
Donation of Services: “Let’s say you donate $1,000 worth of services to a charity. Basically, same thing applies – you’ve already deducted the cost of the labor when you paid the service providers who donated the services, the cost of the backbar, utilities and rent. You can’t deduct those again. And you can’t deduct the amount you would have earned above those costs, because you actually didn’t earn it.”
Monetary Contributions: “Cash donations are tax deductible, but I’d still caution a salon to be careful. If they are structured as a C corporation, only donations up to 5 percent of net profits are tax deductible. If they are structured as an S corporation, then you’d have to itemize to get the deduction, and the standard deduction is set pretty high right now, which doesn’t make it practical for some people to itemize,” says Kopsa. “I’d also caution people to look and see if the donation could be counted as a promotion – is the charity going to publicize or run an ad of its sponsors – then you might be able to count it toward your promotion budget and then the deduction is much more straightforward.”
Calculating The Real Cost of Your Contribution: Before Kopsa’s advice talks you out of making a donation, he offers some final words of advice. “You have to calculate the cost of every dollar. For example if you are in a 38% tax bracket and you buy a mirror for $1,000, the mirror is really costing you $620 because you are able to write 38% of that cost off,” he says. “That thinking always helps you reevaluate how much you can afford to give.”
That, and remembering there are other benefits to giving that are harder to put a price on – the goodwill you generate in your community and the positive culture you generate within your team.