Tax Aspects of Donations and Aids Due to Natural Disasters
Introduction
Donations and aid are made to meet urgent needs arising from natural disasters. Since donations and aids are not related to the business activity, they are generally not deductible from commercial income. However, donations and aids made under certain conditions specified in the relevant legislation can be deducted from commercial income, and if there is income, they can also be used as a deduction on the tax return.
1. In-kind Donations and Aid to Entities Engaged in Food Banking Activities
According to Article 40 of the Income Tax Law, food, cleaning, clothing, and fuel items donated to associations and foundations engaged in food banking for the purpose of helping the poor can be considered as an expense and deducted from the cost price in accordance with the procedures and principles determined by the Ministry of Finance.
In this context, donations must be made to associations or foundations engaged in food banking, and the donated items must be in the form of food, cleaning, clothing, or fuel.
These in-kind donations are exempt from VAT under the Value Added Tax Law. VAT is not calculated on these deliveries. Even if the donation amount is below the invoice threshold for the relevant year, an invoice should be issued with the statement: “Since it is donated to aid those in need, no VAT has been calculated.” In addition, the VAT charged on transactions made under the exemption can be deducted, but VAT that cannot be offset through deductions will not be refunded. Therefore, no adjustment is required for the amounts recorded in the 191-Input VAT account related to the donated goods.
If donated goods are part of the commercial enterprise, their cost price is recorded as an expense. This is done by recording the invoice both as income and as an expense.
In this context, there is no need for the institution’s profit to be realized for the donation and aid to be considered an expense. The cost price of the donations can directly be shown as an expense, and if there is a loss, it may increase the loss.
2. Donations and Aid That Can Be Deducted on the Tax Return
For donations and aids to be considered as a deduction on the tax return, there must be taxable income for the relevant period. These donations and aids cannot increase the loss, nor can they be carried forward to the next period if there is no income.
For donations and aids made in kind or in cash to be considered as a deduction by corporate tax taxpayers, they must be made in return for a receipt. However, cash donations can only be deducted if they are documented by bank receipts showing that the donations were deposited into accounts opened for this purpose.
Additionally, VAT exemption applies to in-kind donations and aids made to the following institutions:
- General and annexed budget agencies, special provincial administrations, municipalities, villages, public institutions and organizations established by law or Presidential Decree, associations serving the public interest, and foundations granted tax exemption by the President.
The VAT charged on deliveries made under the exemption can be deducted, but VAT that cannot be offset through deductions will not be refunded. Therefore, no adjustment is required for the amounts recorded in the 191-Input VAT account related to the donated goods.
2.1 Donations and Aid Limited to 5% of Profit Made to Certain Institutions
Donations and aids made to general and special budget public administrations, special provincial administrations, municipalities, villages, foundations granted tax exemption by the Cabinet, and associations serving public interest, can be deducted from corporate income up to 5% of the institution’s profit for the relevant year, provided that they are shown separately on the corporate tax return.
These donations can be made in kind or in cash.
The total amount of donations and aid that can be deducted when determining the corporate tax base is limited to 5% of the corporate income for that year.
The corporate income taken into account for determining the deductible donation and aid amount is the amount before deductions for exemptions and deductions, including the commercial balance profit minus (participation income exemptions + previous year losses).
2.2 Cash Donations to the Turkish Red Crescent (Kızılay)
Cash donations made to the Turkish Red Crescent (Kızılay) in return for a receipt can be fully deducted from the corporate income, provided that they are shown on the corporate tax return.
The same rules for in-kind donations apply to donations made to the Turkish Red Crescent.
Donations made to the economic enterprises of the Turkish Red Crescent cannot be deducted.
2.3 Donations Made in Return for Receipts to Campaigns Started by the President
Cash and in-kind donations made in return for receipts to campaigns started by the President can be fully deducted from corporate income on the tax return.
In this context, donations made to AFAD (Disaster and Emergency Management Authority) can be deducted from the corporate income on the tax return without any limit.
3. Donations and Aid Made Under the Law on Measures to Be Taken for Aid Due to Publicly Influential Disasters
Donations made to the National Aid Committee and local aid committees set up to help those affected by disasters, in return for a receipt, are exempt from all kinds of taxes, duties, and fees. In addition, the entire amount of donations made to these committees can be considered as an expense.
So far, no announcement has been made regarding the Kahramanmaraş earthquake in this regard. However, it is expected that the region will soon be declared a publicly influential disaster zone.
Conclusion
It is possible to deduct donations made to meet the urgent needs in the disaster area from the corporate income, provided that the procedures and principles summarized above are followed.
Best regards,
BİLGENER
