IR-2026-135 and the charitable deduction for non-itemizers: Sweep Every Client's Books for Donations Booked as Expenses and Route Them by Entity Before Year-End

The charitable deduction for non-itemizers starts with 2026 returns at $1,000 per person, $2,000 on a joint return, and the IRS confirmed it on November 10. The firm's job is not the deduction. It is finding every donation a client paid from a business account, pulling it out of expenses, and routing it by entity type before year-end.

The IRS wrote its release for individuals. Firms see the same rule from the other side. In client QuickBooks Online files, donations end up in Advertising, Meals, Dues and Subscriptions, or Office Expense because the client paid a gala invoice or a fundraiser from the operating account and the bank feed guessed. Each of those entries is wrong for tax in a different way depending on the entity, and 2026 adds two floors and a cap that change what a reclassified donation is worth.

Why now: the IRS release landed November 10 and four charitable rules change for 2026

In IR-2026-135, published 2026-11-10, the IRS reminded taxpayers who claim the standard deduction that they may deduct up to $1,000 of qualifying cash contributions, or $2,000 on a joint return, beginning with tax year 2026 returns filed in 2027. Noncash gifts do not qualify. Cash paid to a supporting organization, or to establish or maintain a donor-advised fund, does not qualify. The taxpayer needs receipts, canceled checks, bank records, or a written communication from the charity showing its name, the date, and the amount. The IRS Working Families Tax Cuts page, updated 2026-11-10, adds that the gift must be made during the tax year and that nothing carries over.

The same law changed three other things for tax years beginning after December 31, 2025, which The Tax Adviser laid out on 2026-07-31. Itemizers deduct charitable gifts only to the extent the aggregate exceeds 0.5% of their contribution base, which for most people is adjusted gross income, and the amount under the floor is permanently lost unless a percentage limit also creates a carryover. Corporations deduct only the amount above 1% of taxable income, with the 10% ceiling unchanged. Taxpayers in the 37% bracket lose two thirty-sevenths of the value of itemized deductions above the bracket threshold, which is $640,600 for single filers and $768,700 for joint filers in 2026. The non-itemizer deduction is exempt from the 0.5% floor.

What makes this a firm problem rather than a client problem is where the data lives. Every one of those rules applies at the level of the person or entity that files the return, but the donation itself sits in a business ledger, coded by whoever paid the bill. A firm with 40 client files cannot answer "how much did this client give in 2026, and where does it belong" without opening each file, unless the sweep is one query that runs across all of them.

Where a donation lands depends on the entity, not the bank account

The bank account that paid the charity decides nothing. The entity type decides everything. A sole proprietor's business checking account is the owner's money, so a gift from it is the owner's gift. An S corporation's gift belongs to its shareholders in proportion to ownership. A C corporation's gift belongs to the corporation. The one exception is a payment that is really a purchase.

That exception is in Treasury Regulation 1.162-15(a)(1). A payment to a charity that bears a direct relationship to the trade or business, made with a reasonable expectation of financial return commensurate with the amount, may be deducted as a business expense under section 162 rather than as a charitable contribution. The regulation's own example is a sole proprietor who pays $1,000 to a church for advertising space in a concert program that prints the business website. That payment stays in advertising. A $1,000 check to the same church with nothing printed anywhere is a contribution.

Entity	Where the payment sits after the sweep	Where it lands on the return	2026 limit that applies
Sole proprietor or single-member LLC	Owner's draw (equity)	Owner's Form 1040: Schedule A, or the non-itemizer line	0.5% of AGI floor if itemizing; $1,000 or $2,000 cap, cash only, no carryover if not
Partnership or multi-member LLC	Charitable contributions, separately stated	Schedule K-1 (Form 1065) box 13, code A or B	Each partner's own floor and percentage limits
S corporation	Charitable contributions, separately stated	Schedule K line 12a, then each shareholder's K-1	Each shareholder's own floor and percentage limits
C corporation	Charitable contributions expense	Form 1120 deduction	1% of taxable income floor, 10% ceiling, five-year carryover of the excess over the ceiling
Any entity, payment with a commensurate return benefit	Advertising or marketing expense	Ordinary business deduction under section 162	No charitable limit; Reg. 1.162-15 governs

Two reporting facts anchor the pass-through rows. The Form 1120-S instructions put cash contributions on Schedule K line 12a, code A for 60% limit gifts and code B for 30% limit gifts, and the corporation does not deduct them on page 1. The Schedule K-1 (Form 1065) instructions use box 13 with the same cash codes and state that it is the partner's responsibility to consider and apply any applicable limitations. In both cases the entity is a conduit. The 0.5% floor, the 60% limit, and the standard deduction question all get answered on the owner's return.

The year-end donation sweep: six steps across every client file

Run this once in November and once more after the December bank feeds post. It takes the firm from "we think some clients donated" to a per-client, per-entity schedule with a tax outcome on each line.

1. Pull candidates from the books, not from memory. Query every client file for 2026 transactions where the payee or memo contains donation, sponsorship, gala, fundraiser, foundation, church, booster, auction, or the name of any charity the client has paid before. Include the Advertising, Meals, Dues, Office, and Miscellaneous accounts, because that is where these payments hide. Export payee, date, amount, account, memo, and whether an attachment exists.
2. Classify each payment as purchase, contribution, or mixed. Apply the 1.162-15 test. A banner, a program ad, a sponsorship with the business name on a jersey, or a table at a trade event that produces leads is a business expense. A gift with no return benefit is a contribution. A gala ticket is mixed: the amount above the fair value of the dinner is the gift, and the charity's acknowledgment should state that value.
3. Route the contribution by entity. Sole proprietor and single-member LLC: reclassify to owner's draw. Partnership and S corporation: move it to a charitable contributions account that your tax mapping treats as separately stated, outside ordinary business income. C corporation: keep it in charitable contributions expense and compute the 1% floor against projected taxable income.
4. Check the substantiation now, not in March. For any single gift of $250 or more, Publication 526 requires a contemporaneous written acknowledgment that states the amount and describes any goods or services received, obtained before the return is filed. Gifts under $250 need a bank record or a written communication from the charity. Attach the acknowledgment to the transaction in the client file so the preparer finds it where the number is.
5. Test the owner-level outcome. For each individual owner, estimate whether they will itemize in 2026 using the bracket and standard deduction projection you already built for Rev. Proc. 2026-35. Non-itemizers get up to $1,000 or $2,000 of cash gifts to public charities, nothing for the excess, nothing for noncash, and nothing for gifts to a donor-advised fund. Itemizers lose the first 0.5% of AGI.
6. Write the decision memo per client. One paragraph: what was found, where it moved, what the owner can deduct, what is permanently lost under the floor, and whether a December decision changes the answer. That memo is the advisory deliverable, and it is also what the reviewer signs.

Here is the sweep applied to three clients from one firm.

Client A, sole proprietor, single filer, standard deduction. The sweep finds $1,800 paid to a regional food bank coded to Advertising, plus $600 to a youth soccer league for a field banner with the business name and web address. The banner stays in Advertising under 1.162-15. The $1,800 is reclassified: debit Owner's draw $1,800, credit Advertising $1,800. Schedule C net profit rises by $1,800, and self-employment tax rises with it. The owner claims $1,000 under the non-itemizer deduction. The other $800 produces no 2026 deduction and does not carry over.

Client B, S corporation, two 50% shareholders. The sweep finds $6,000 paid to a hospital foundation, coded to Other Expenses. It moves to Charitable contributions, separately stated, and appears on Schedule K line 12a code A, $3,000 per K-1. Ordinary business income on the 1120-S rises by $6,000. Book net income does not change, which is why the account needs a tax mapping rather than a different P&L. Shareholder one itemizes with $250,000 of AGI and no other gifts: the floor is $1,250, so $1,750 is deductible and $1,250 is permanently disallowed. Shareholder two takes the standard deduction. Whether a cash gift that arrives through a K-1 counts toward that shareholder's $1,000 non-itemizer deduction is not addressed in IR-2026-135, so the memo flags it for the preparer instead of assuming either answer.

Client C, C corporation, projected 2026 taxable income of $300,000 before contributions. The sweep finds $2,500 of gifts across four charities. The 1% floor is $3,000, so the 2026 deduction is $0, and because the 10% ceiling of $30,000 was never reached there is no carryover vehicle for the disallowed amount under The Tax Adviser's reading of the statute. The decision belongs to the client: give nothing more and accept the result, or give $500 more to reach the floor by December 31, after which every additional dollar is deductible up to the ceiling. If the corporation is on the accrual method, a board-approved contribution made before year-end and paid within three and a half months after can count for 2026.

At 40 clients and an average of four candidate transactions per file, the sweep is 160 lines. With the query built once, it is under an hour of staff time per month-end instead of a file-by-file hunt in January. The same pattern runs the 1099-NEC vendor payment test, and it is worth doing both in one pass, since many sponsors and event venues are also vendors.

Accounting controls: source data, calculation, review, and decision owner

Source data. The general ledger of each client file at transaction grain: payee, date, amount, account, memo, and attachment. The charity's acknowledgment letter is source data too, and it is the only evidence of fair value received on a mixed payment. Nothing in this process should start from a spreadsheet someone typed. Every line traces to a posted transaction.

Calculation. Deterministic and per entity. Sole proprietor: the contribution total is the sum of reclassified lines, and the non-itemizer amount is the lesser of that total and $1,000 or $2,000, counting only cash gifts to public charities. Itemizer: the deductible amount is what survives the percentage limits minus 0.5% of projected AGI, not below zero. C corporation: the deductible amount is contributions minus 1% of projected taxable income, not below zero, capped at 10%. Each of these is a flow measure over the 2026 period. The owner's draw balance that absorbs a sole proprietor's reclass is a point-in-time equity balance at December 31, and the reclass does not change total equity: net income rises and draws fall by the same amount.

Polarity. Reclassifying a donation out of an expense is a credit to the expense account, paired with a debit to equity (the draw) for a sole proprietor or a debit to a separately stated contributions account for a pass-through. The expense credit raises net income. For a pass-through, ordinary business income on the entity return goes up while the owner's personal deduction, subject to the owner's own floor, goes down. The net tax effect is rarely zero.

Review. The reviewer checks three ties: the contributions account balance per client equals the sum of acknowledgments on file; the Schedule K line 12a or box 13 total equals that balance; and any payment left in Advertising has a documented return benefit. The reviewer also confirms that the AGI and taxable income used in the floor calculation match the client's current-year projection, not last year's return.

Decision owner. The client owns the decision to give more, give less, or bunch into 2027, and the memo must say so. The preparer owns the classification call between section 162 and section 170 where the facts are close. The firm owns the control that the sweep ran on every file, with a date and a reviewer initial, because a missed file in January is an amended return in June.

Limits and common mistakes

• Pledges are not payments. A cash-basis owner deducts when the charity is paid. A pledge recorded as a payable in December is not a 2026 gift unless it is paid by December 31. A gift charged to a credit card is paid when charged, even if the card is paid in January.
• Donor-advised funds and supporting organizations are out for non-itemizers. A client who routes giving through a community foundation's donor-advised fund gets nothing on the $1,000 line. Itemizers can still deduct those gifts above the floor.
• Noncash is a different track. Inventory, equipment, and gift cards are excluded from the non-itemizer deduction, and noncash gifts over $500 need Form 8283 on the owner's or entity's return.
• Gala tables and auction purchases are mixed. Only the amount above the fair value of what was received is a gift, and the acknowledgment must state that value. The dinner part is often a business meal at 50%, which is a third account.
• Married filing separately and K-1 pass-through eligibility are not addressed in IR-2026-135. Treat both as open questions for the preparer rather than facts for the memo.
• Gifts to people are not gifts to charities. Crowdfunding for a family, a collection for an employee, or a payment to an individual in need is not deductible under section 170 at all.

The sweep is only as good as the payee and memo data in the file, so a donation entered as a bare bank-feed line will surface only if the amount or the account looks odd. Projected AGI and taxable income are estimates until the year closes, and the floor calculations move with them. None of this replaces the preparer's review of the owner's full return.

FinBoard runs the same query across every connected QuickBooks Online file at once, drills from a per-client total to the posted transaction, and keeps each entity's reclassified ordinary income in one report. See how a cross-client donation sweep looks in FinBoard, or read how firms package work like this as advisory services.

Frequently Asked Questions

Can a sole proprietor deduct a donation paid from the business bank account on Schedule C?

No. A gift to a charity with no return benefit is the owner's personal contribution, recorded as an owner's draw in the books and claimed on the owner's Form 1040, either on Schedule A or, for 2026 non-itemizers, as the cash deduction of up to $1,000 or $2,000. Only a payment with a commensurate business return benefit, such as a program ad, stays on Schedule C under Regulation 1.162-15.

How much is the charitable deduction for non-itemizers for 2026?

Up to $1,000 of qualifying cash contributions for an individual, or $2,000 on a joint return, for gifts made during 2026 and claimed on the return filed in 2027. Noncash gifts, gifts to supporting organizations, and gifts to establish or maintain a donor-advised fund do not count, and there is no carryover of any excess.

Does the 0.5% of AGI floor apply to the non-itemizer deduction?

No. The 0.5% floor applies to itemized charitable deductions for tax years beginning after December 31, 2025. The non-itemizer deduction under section 170(p) is exempt from the floor, which is why a client with modest giving and a standard deduction can come out ahead of an itemizer with the same gifts.

When is a payment to a charity a business expense instead of a contribution?

When it bears a direct relationship to the trade or business and is made with a reasonable expectation of financial return commensurate with the amount, under Regulation 1.162-15(a)(1). Advertising in a charity's program, a sponsorship that displays the business name, or an event that produces customers meets the test. A check with nothing expected in return does not.

What records does a client need for a cash donation?

For any gift under $250, a bank record or a written communication from the charity showing its name, the date, and the amount. For any single gift of $250 or more, a contemporaneous written acknowledgment from the charity that states the amount and describes any goods or services received, obtained before the return is filed.