When it comes to income tax in Korea, understanding donations and their inclusion in necessary expenses is essential. This article will break down the rules and limits for different types of donations, so you can have a clear understanding of how they affect your taxable income.
Designated Donations and Necessary Expenses
Under Article 34(2) of the Income Tax Act, designated donations are subject to specific rules for inclusion in necessary expenses. The calculation varies depending on the type of organization receiving the donation.
1. Donations to Religious Groups
For donations to religious groups, the upper limit of inclusion in necessary expenses is calculated as follows:
Upper Limit = A × 10% + Min[(A × 20%), designated donations made to organizations other than religious groups]
2. Donations to Other Cases
For donations to organizations other than religious groups, the upper limit of inclusion in necessary expenses is calculated as:
Upper Limit = A × 30%
※ A : Standard amount of income ‒ Statutory donation ‒ Donation for political funds ‒ Donations made to employee stock ownership association
- Donations spent for essential business expenses in social welfare foundations, kindergartens, elementary/ middle/ high schools, universities, religious organizations, and designated donation organizations similar thereof prescribed by the ordinance of the Ministry of Strategy and Finance
- Donations spent on scholarships for individuals recommended by the principal of kindergartens, elementary/middle/high schools and universities
- Donations prescribed by the ordinance of the Ministry of Strategy and Finance spent for the purpose of promoting public good, such as social welfare, culture, art, religion, charity, and academic research
- Donations offered to social welfare facilities prescribed by presidential decree which can be used free of charge or at a government-subsidized price
Other Donations
Donations that do not fall under the aforementioned categories prescribed by tax-related laws are not included in necessary expenses.
Carried Forward Tax Credit
If the amount of donation exceeds the applicable ceiling, you can carry forward the excess amount for the following period, starting from the first day of the subsequent taxable period. This excess amount can be included in necessary expenses.
- Statutory donation: Within 10 years from the first day of the taxable period following the relevant taxable period (2014-2018: 5 years)
- Designated donation: Within 10 years from the first day of the taxable period following the relevant taxable period (applicable to donations made on or after Jan. 1, 2013)
Please note that carried forward tax credit is not applicable to donations for political funds and donations made to employee stock ownership associations.
Conclusion
Understanding donations and their inclusion in necessary expenses is crucial for managing your income tax in Korea. Make sure to adhere to the rules and limits for different types of donations to optimize your tax deductions.