Giving money to charity might seem counterintuitive to those running a for-profit company. However, it is important to keep in mind that charitable giving can not only make a big difference to the recipients of your generosity, but it can also provide a net gain to your business. In addition to the potential tax advantages of charitable giving, donations have been shown to boost employee morale and productivity, improve a company’s brand image, and build customer relationships.
There’s no one-size-fits-all plan for giving back. Each business should choose a cause that aligns with its brand, culture, and mission statement. To reap the full tax benefits, businesses should also make sure that they understand Internal Revenue Service (IRS) rules applicable to charitable giving, which have become more complicated in recent years.
Small Businesses Make a Big Impact
Approximately 75 percent of small businesses donate an average of 6 percent of their profits to charitable organizations annually, according to SCORE, the nation’s largest network of volunteer, expert business mentors. Compared to larger businesses, small businesses donate 250 percent more to local nonprofits and community causes. Small businesses most often support their communities in the following ways:
- Giving to local charities
- Supporting youth organizations
- Donating to local first responders
- Supporting local religious organizations
- Aiding local service groups
- Donating food or volunteering in soup kitchens
Why Doing Good Is Good For Business
Rather than thinking of charitable donations as a cost, think of them as an investment that helps to differentiate your business in the eyes of your employees and your customers.
Employee Engagement and Performance
Evidence suggests that charitable donations are an effective means of increasing job performance, especially among millennials, who tend to be philanthropically-minded.
A study published in the journal Management Science found that including employees in a company’s charitable giving was associated with a 13 percent increase in job performance. Other research indicates that charitable giving and volunteering are directly related to employee engagement. Charitable giving may also improve company culture. Positive company culture has been shown to make employees happier, more loyal, and more productive.
Company Brand and Reputation
It is not just employees who have a favorable view of companies that give back. Charitable contributions can also provide good public relations and attract more customers.
Aside from the benefits that donations provide to local organizations, donating is a way to connect with the local community, which is the backbone of a small business. Through donations or sponsorship of fundraising events, your business can build relationships with other organizations and individuals, which, in turn, can build name recognition and customer loyalty, resulting in increased business.
Today’s consumers care about where their money goes. More than 90 percent of consumers expect companies to do more than make a profit, according to a survey from Cone Communications. Many are even willing to pay more for a socially responsible product.
Charitable Giving and Tax Deductions
Deducting qualifying charitable donations reduces the amount your business pays in taxes. One of the first rules of charitable contributions is that you must itemize deductions. Because standard deduction amounts increased under the Tax Cuts and Jobs Act of 2017, fewer people are itemizing deductions than in past years.
If you are not itemizing deductions, but still want to give charitably and receive a tax break, there are ways to get around the law, including the use of a donor-advised fund, giving larger amounts every other year, and donating appreciated assets (like stock). Talk to a financial expert about which donation strategies make the most sense for your business.
If you do itemize your deductions and claim charitable donations, your donations will need to meet certain requirements, including the following:
- The charity must be tax exempt under section 501(c)(3) of the Internal Revenue Code. You can check an organization’s eligibility to receive tax-deductible charitable donations using the IRS’s search tool. Individuals, social and sports clubs, political groups, most foreign organizations, for-profit schools, and other types of organizations do not qualify to receive deductible contributions.
- The three basic types of charitable gifts that can be deducted are cash, property or equipment, and travel expenses that result from helping a charitable organization. Donation limits apply, but they are quite high (generally 30 to 60 percent of your adjusted gross income, depending on the type of organization).
- You should keep track of your donations with written records in case you are audited. The IRS also requires you to obtain written acknowledgement of the donation from the recipient for any contribution of $250 or more (including cash or property).
- You must fill out an IRS form for each non-cash contribution that is more than $500.
- The IRS has special rules for some types of donations, such as automobiles and inventory. There are also rules for determining the value of donated property.
Next Steps
For many businesses, the benefits of charitable giving make the decision to give back easy. However, there is nothing easy about complying with the complex federal tax code. If you are interested in creating a specific giving plan, consult our experienced lawyers who can help your business reap the full tax advantages of charitable donations.
This article is a service of Greg Gordillo, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Schedule your LIFT Session today!