When are my donations deductible?
Whether it’s a monthly donation to a green climate fund, an annual gift to a museum or sponsoring new shirts for a local football club; you will probably have made a donation at some point in your career as an entrepreneur. And while it’s clearly very noble to donate to a good cause, it also holds some tax advantages! In this article, we’ll explain which donations are deductible and can be made on behalf of your business.
As an entrepreneur, it’s possible to make a business donation; to promote your brand awareness for example. In addition, you can also make a donation to a good cause without entrepreneurial motives, of course. Each situation has different consequences for your financial administration.
Donating as a sole proprietor
Maybe you’re thinking of making a donation to a charity or club on behalf of your sole proprietorship. In order to be allowed to deduct the costs of the donation from your profit, the donation needs to contribute to your business. This is the case if, for example, you pay money for an advertising board on the side-line of a sports club. Or if you sponsor a public event that can boost your image. So if the donation is clearly beneficial to your business, you’re allowed to file it as a business expense. This is not the case with periodic donations to a climate fund, for example. But as a private person, you are allowed to declare these gifts as a deductible item for income tax.
Donating as a private person
As a private person, you can donate to any charity you like, without it having to be beneficial. When declaring these gifts for income tax, the amount will be deducted from your total income in box 1. Your total income is put through the different tax brackets, resulting in a certain amount you end up paying. So your donation isn’t directly deducted from the final amount, but does affect the total income with which the taxes are calculated.
However, to be allowed to deduct donations there are certain conditions you have to take into account. Donations in cash are not deductible, for example. And the donation needs to be made to one of the following types of institutions:
- An organisation with a (cultural) ANBI status
- A club
- A social interest organisation (SSBI)
You can use this search engine of the Dutch Tax and Customs Administration to find out whether an institution has an ANBI status. If the organisation has a cultural ANBI status, you can even increase your donation by 25%, which is extra beneficial of course!
The amount you’re allowed to deduct after having made a donation to one of the three types of institutions mentioned above, depends on whether the donation is a periodic gift or an ordinary (one-off) gift.
Periodic donation or ordinary donation
A periodic donation can be fully deducted in your income tax return. But registering periodic donations properly does require some extra work. You need a written permission of the fact that the charity is allowed to periodically debit the donation. You will receive a transaction number when you sign the agreement with the charity, which must be entered when submitting your tax return. The Dutch Tax and Customs Administration can request this agreement for inspection. It’s therefore important to store the agreement safely. The donation agreement also needs to be valid for a minimum of 5 years and must state an end date. Please note that for donations to a club, this is the only way to make donation, as ordinary donations to clubs aren’t deductible.
An ordinary donation may only be included as a deductible item if the total of your donations exceeds the threshold amount. This threshold is set at 1% of the total income of that year. This makes it difficult to estimate the threshold amount during the year. You’re allowed to deduct the share of donations that exceed the threshold. It’s therefore possible that your donations are not deductible at all or only partially. In addition to not being able to deduct an ordinary donation unless you pass the threshold amount, donations are also limited to 10% of your income.