When businesses donate to various charitable organizations and events, the treatment and classification of those contributions for tax purposes can be confusing. Below are recommendations for various situations:
- Donations to a nonqualified Sec. 501(c)(3) organization, which are not deductible charitable contributions, but which may be deductible as advertising or entertainment expenses;
- Charitable contributions with value received, meaning the donor received something of value in return for the donation; and
- Contributions of less than $250, which businesses should be certain to substantiate.
Donations to an entity that is not a qualified Sec. 501(c)(3) organization
Sec. 170 provides the rules under which a taxpayer is allowed a deduction for a charitable contribution. Sec. 170 notes that donations and sponsorships that are not directly contributed to a qualified Sec. 501(c)(3) organization are not deductible as charitable contributions. If a contribution is made to an organization that is not a qualified Sec. 501(c)(3) organization, consider whether the contribution can be classified as either an advertising and marketing expense or an entertainment expense depending on the specific good or service donated.
Advertising and marketing expense: Under certain conditions, a business may deduct what would appear to be a charitable contribution as an advertising and marketing expense. For the expense to be classified as an advertising expense, the business needs to substantiate that it received something in return (a direct benefit), so the cost can be classified as an "ordinary and necessary business expense." If the business just has its name and logo published, the IRS does not consider that to be a "substantial return benefit" and does not consider it to be a deductible advertising expense. Instead, it would be more beneficial for the business to follow the guidance provided under IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, of what constitutes an advertising expense, which includes (1) messages containing qualitative or comparative language, price information, or other indications of savings or value; (2) an endorsement; and (3) inducements to purchase, sell, or use the products or services. When these attributes are in place, the business would likely be able to deduct the fair market value (FMV) of its total contribution as a marketing expense.
Entertainment expense: If the expense can instead be classified as entertainment, Sec. 274(d) provides guidance on how to substantiate entertainment expenses: The business must maintain adequate records that include (1) the amount of such expense or other item; (2) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property; (3) the business purpose of the expense or other item; and (4) the business relationship to the taxpayer or persons entertained, using the facility or property, or receiving the gift.
Charitable contributions with value received
According to Regs. Sec. 1.170A-1(h), to determine the amount of the charitable contribution deduction, charitable contributions must be reduced by the FMV of goods or services received in return for the charitable contributions. The excess amount contributed over the FMV is fully deductible as a charitable contribution. The FMV of the goods or services received in return for the contribution may be included in meals and entertainment, of which the business can deduct 50%. As indicated previously, to claim the meals and entertainment deduction, a taxpayer must keep adequate records about the expense, including the amount, time and place, business purpose, and business relationship of the attendees.
Contributions not in excess of $250
Sec. 170(f)(8)(A) requires taxpayers to substantiate a contribution of $250 or more by obtaining an acknowledgment letter from the qualified Sec. 501(c)(3) charitable organization. The acknowledgment letter must contain the following information: (1) the amount of cash and a description of any property other than cash contributed; (2) a statement whether the donee organization provided any goods or services in consideration for the contribution; and (3) a description and good-faith estimate of the value of any goods or services provided in consideration for the contribution.
A donation under $250 does not require an acknowledgment letter. The IRS, however, still requires evidence of the charitable contribution to support the charitable deduction. For cash contributions under $250, Sec. 170(f)(17) provides the reporting and recordkeeping required to substantiate the contribution deduction. As indicated under this section, some ways to substantiate the deduction adequately would be to maintain a bank record (such as a canceled check, bank statement, or a credit card statement) or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.For noncash contributions under $250, Regs. Sec. 170A-13(b) provides that a taxpayer must obtain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property in detail reasonably sufficient under the circumstances. However, a taxpayer is not required to obtain a receipt if the contribution is made in circumstances where it is impractical to obtain a receipt (e.g., by depositing property at a charity's unattended drop site). In these cases, the regulations require the taxpayer to maintain reliable written records with respect to each item of donated property that includes the same information otherwise required on the receipt, the property's cost and FMV, and certain other information.Company policy can be set at a lower threshold to substantiate any amount. Companies are well-advised to adopt the Sec. 170(f)(17) and Regs. Sec. 170A-13(b) recordkeeping requirements for a charitable contribution of less than $250.
Mark Heroux is a principal with the National Tax Services Group at Baker Tilly Virchow Krause LLP in Chicago.
For additional information about these items, contact Mr. Heroux at 312-729-8005 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.