Many entrepreneurs make corporate philanthropy an important part of their business mission. “Giving back” can take the form of volunteering time or donating cash, stock, real estate, excess inventory, or other assets to charitable organizations. The good news is that donations of cash or property made to qualified charitable organizations are usually tax-deductible to the business.
The most important criteria for deducting charitable contributions on your federal corporate income tax return is simply that the recipient meet the Internal Revenue Service’s definition of a qualified charitable organization. These are defined in Section 501(c)(3) of the IRS code and include most religious, educational, scientific, literary, and charitable groups. Qualified charitable organizations should be able to produce paperwork from the IRS validating their 501(c)(3) status.
One of the big benefits of making charitable contributions as a business, as opposed to as an individual, is the different vehicles available to help facilitate giving. These include the following:
- Donor advised funds: These are increasingly popular due to their flexibility and tax advantages. You transfer assets to a sponsoring organization, such as a public charity or financial institution, which establishes the fund and performs all the legal, accounting, and philanthropic work involved. You (or someone you appoint) also advise on how you would like the fund’s investments or charitable distributions to be spent.
- Charitable remainder trust: This is a combination of estate planning and charitable giving, a strategy that places assets in a trust that generates income for you or your beneficiary. Your designated charity receives the property upon your death.
- Private foundations: This is becoming an increasingly popular strategy. The number of independent foundations in the United States has more than doubled in recent years, while assets and total giving have more than tripled. While generally thought of as a giving tool primarily for wealthy donors and large charitable gifts, half of foundations report less than $50,000 in annual giving.
- Pooled income funds: These are similar to charitable remainder trusts but easier to administer. Assets are pooled from a number of different donors, all of whom receive regular income, with the balance reverting after their death to the charity or charities they designate.
The charitable giving vehicle you choose should be based on your charitable and tax-planning objectives. With a charitable remainder trust, for instance, you can make a future charitable donation and get an immediate tax deduction, while also maintaining a stream of current income. A charitable remainder trust can also help reduce your estate for tax purposes.
One of the most tax-efficient ways to give is to donate appreciated property, primarily stocks that you’ve held for at least one year. Why? You can deduct the fair market value of the stock at the time you donate it, and you won’t have to pay capital gains taxes on the appreciation like you would if you sold it.
Keep in mind that if you contribute merchandise, inventory, or equipment to a qualified charitable organization, your deduction should be based on the property’s current fair market value. And if you receive something of value in return for a donation, you can only deduct the difference between the amount or value of your donation and the value of what you received in return.
For more details on the tax rules and ramifications of making charitable contributions from your business, consult IRS Publication 526 and your tax advisor.
Don Sadler is a freelance writer and editor specializing in business and finance.