Charitable giving is often connected to personal motivations, but, as a business owner, it might just make good business sense too.
According to a study by Cone Communications, 85 percent of consumers have a more positive image of a company when it supports a cause they care about, so opening up the company checkbook for charity may actually provide you with an instant image boost.
Aside from positive publicity, charitable donations also provide you with a tax break and can help unite your employees behind a charitable goal. However, donating as a business owner will also mean taking into account different concerns than donating as an individual. It’s important for you to be aware of how donating can affect both your company’s image and tax filings before incorporating your business into your charitable giving strategy.
Finding your cause
When donating as an individual, you can choose any cause you want to support, and make the decision based on what you personally feel the most strongly about. As a business owner, you have some other factors to consider.
If you have employees, conduct a company survey of what causes they most want to support and base your choices off these results. If your employees feel connected to the cause, it is more likely to boost company morale and help with promotion of the charity, as employees will be more likely to encourage friends and family to donate if they feel good about the cause.
Just as with individual donations, your access to funds may also determine whom you choose to donate to. If you have limited resources, you will likely want to put all of them toward one cause, whereas if you have a larger pool of funding, you may be able to give a considerable amount to a few organizations.
When deciding on possible charitable organizations to support, you should consider how your business’ mission fits with each charity. It can make sense to donate to a charity with close ties to your industry; for example, a restaurant owner may want to donate to an organization that provides food for the needy, or a solar energy company may want to support an environmental nonprofit. It’s likely that these causes align with your charitable mission anyway, and supporting a charity that may influence your target market makes the most sense from a business standpoint, as pursuing causes that your customers believe in can help improve company image.
How to donate
Depending on the size of your business, you may find it difficult to find the resources to give. Just as you will want a charitable strategy when giving as an individual or a family, your business should also have a charitable strategy. Based on your business’ structure and how closely your personal finances are tied to those of the business, these strategies may be integrated or separate.
No matter your situation, the charitable strategy for your business should address things like goal-setting, budgeting, research on charitable organizations and giving tools, and ways of measuring success. Without a specific plan, you may end up under- or over-allocating business resources to your charitable causes, which isn’t good for your business’ budget.
Donating from your business still offers the same options as donating individually; that is, you can give cash, appreciated securities or other noncash assets. In this case, a cash donation would be made from the business’ income rather than your personal income (although for some business structures, these are one and the same), and you may have increased options for donating assets. For example, if your business produces goods, you could donate merchandise to charity, or you could donate business equipment that you no longer have a need for, provided it’s still in good condition. If your business is structured as a corporation, donating inventory in this way may even qualify you for a larger deduction.
Promoting your charitable giving strategy
As an individual, you may choose to donate anonymously, and even if you don’t, it’s not likely you will be broadcasting your charitable donations to the neighborhood. However, as a business owner, some aspect of marketing should be included in your charitable giving strategy.
The Cone Communication study also found that 88 percent of Americans think it’s acceptable for companies to involve a cause or issue in their marketing campaigns, and 41 percent say they bought a product specifically because it was associated with a cause or issue. While increased sales are probably not your biggest motivation behind donating, not capitalizing on the possibility for increased revenue from your donations is a missed opportunity.
Consider sending out a press release highlighting your charitable efforts to the community, including a philanthropy section in your company newsletter or using charitable events to network with other donors. However, keep in mind that if you ask the charitable organization to mention you in its own advertising, it will reduce the amount you can claim as a deduction on your federal tax return.
The specifics of the way you can deduct charitable donations from a business will vary based on your business’ structure and the way you are taxed. However, some restrictions apply to all types of businesses.
While you can deduct income or goods provided to a qualified charitable organization, you cannot deduct your time or services. For example, if you donate part of your business income to a local soup kitchen and also spend five hours per week cooking for the organization, while the portion of your income donated will be deductible, you cannot write off the cost of your services for five hours per week, nor can you write off the loss of income you may experience from taking time to help out. That’s not to say you shouldn’t participate in these volunteering experiences; only that you won’t be able to receive a deduction for doing so.
Also, keep in mind that any donation you make that you receive a benefit for in return will be subject to deduction restrictions. For example, if you make a donation to a charitable organization, and in return receive free ad space in the organization’s newsletter, your deduction amount would be limited to the amount of the donation minus what the ad space would have cost you.
Similarly, if you make a donation that is technically both a charitable contribution and a business expense, such as in the previous example, you cannot deduct any part of the payment as a business expense. To use the business expense deduction, you would have to make two separate transactions; one as a donation and another, separate donation to pay for the ad space. In this way, the IRS ensures that people can’t receive a double benefit for charitable contributions by claiming them both as a donation and as a business expense.
Deductions for C corporations
If your company is structured as a C corporation or an LLC being taxed as a C corporation, you may deduct charitable contributions up to 10 percent of your business’ taxable income for that year. Since a corporation is recognized by the IRS as a completely separate entity from its owners, the corporation itself is able to make charitable donations and take the deductions for those contributions, rather than the business owner claiming them on behalf of the business.
However, C corporations also have an added deduction benefit; if they donate inventory or equipment, they may be able to claim a deduction for up to twice the cost of these items. You may claim the lesser of the following: (1) the basis of the donated inventory or property plus one-half of its appreciation or (2) twice the basis of the donated inventory or property.
Deductions for all other business entities
For all other types of business entities, including sole proprietorships, partnerships, S corporations and LLCs taxed as sole proprietorships or partnerships, you will deduct charitable contributions on your personal tax return.
As a sole proprietor, you will simply itemize these deductions on Schedule A of your Form 1040, and the deductions will be taken from your own income.
As a partnership or S corporation, you will take your percentage share of the company’s total contributions as a deduction on your personal return. You can find these contribution amounts listed on your company’s Schedule K-1, which you can then use to fill out your personal return.
The same holds true for LLCs, depending on if they are taxed as a sole proprietorship or partnership. For these types of flow-through business entities, the individual deduction limits apply, meaning that you may deduct up to 50 percent of your adjusted gross income for regular donations and up to 30 percent for capital gain property.
If donating to a private foundation, the limits are 30 percent for regular donations and 20 percent for capital gain property.
Business owners should also keep in mind that much of the same documentation required for individuals submitting their tax returns is also required for businesses, so be sure to track and keep copies of receipts for your charitable contributions.
This article was written by Advicent Solutions, an entity unrelated to MFA Asset Management, LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. MFA Asset Management, LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. ©2015 Advicent Solutions. All rights reserved.