Some businesses advertise that they will donate a certain percentage of their revenues to a charity. The IRS recently issued guidance from its Chief Counsel that explains how these donations to various organizations are deducted.
In the Chief Counsel Advice (CCA), the business donated funds to organizations that were qualified charities and to organizations that were not qualified charities, but had a social mission included in their corporate bylaws.
Donations to Qualified Charities
An issue that the CCA addresses is whether the donations to qualified charities were deductible as charitable donations (IRC Section 170) or as ordinary and necessary business expenses (IRC Section 162).
The CCA resolves this issue by stating when the transfer to a qualifying charity is directly related to the taxpayer’s business and is made with a reasonable expectation of financial return commensurate with the amount transferred, the transfer is treated as a business expense and not as a charitable donation deduction.
The CCA held that the business appeared to have acted with the reasonable belief that, in establishing the charitable donation program, it would enhance and increase its business. As a result, the business’ donations to qualifying charities were deductible as ordinary business expenses.
This is beneficial to taxpayers for a couple reasons. The first is that, while ordinary business expenses must still be substantiated, charitable donations are subject to much stricter substantiation requirements.
The other reason that it is preferential for these expenses to qualify as business deductions is that charitable contributions are subject to percentage-of-income limitations. Pass through entities pass charitable donations through to their owners where the charitable donations are deducted as itemized deductions (generally limited to 50% of AGI). Ordinary businesses expenses are not subject to these limitations.
Donations to Nonqualified Charities
If the organization is not a qualifying charity then the donation is clearly not deductible as a charitable contribution. However, if the business has a reasonable expectation of commensurate financial return from the donations, then the donation will be deductible as an ordinary and necessary business expense.
There is an exception for donations to organizations that engage in lobbying. A business expense is not allowed for any amount paid in connection with influencing legislation or participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office.
Merely donating money to an organization conducting lobbying activities is not an activity for purposes of supporting a lobbying communication. The CCA says that this phrase is intended to include more direct support such as research, planning, and coordination.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.