Charitable Giving Law and Legal Definition
Many small business owners engage in charitable giving, either as private individuals or in their corporate capacity. This charitable giving can take many forms, including sponsorship of local charitable events, donations of excess inventory, and sustained philanthropy in one or more areas through the establishment of a formal foundation or council. Whatever form the charitable giving takes, experts and entrepreneurs agree that such activity can have a beneficial impact on the company as well as the charities and institutions it supports.
CONTRIBUTIONS OF GOODS AND SERVICES
Charitable giving by small businesses most often takes the form of contributions of goods and, less often, services. Indeed, many companies have made donations of obsolete, excess, erroneously packaged, or slow-moving inventory. The bottom-line advantages of such donations are considerable for small companies. "Not only can you get rid of that inventory and free up warehouse space, but you also can get a hefty tax deduction—often, more than your production costs—and at the same time help a not-for-profit organization," wrote Marsha Bertrand in Nation's Business. Indeed, some companies that donate goods to charitable causes can reap tax deductions that equal the cost of producing those goods plus half the difference between that cost and the fair market value of those goods. The amount of the deduction for which companies are eligible will vary with their legal status. Partnerships, S corporations, and sole proprietorships will only be able to claim deductions amounting to the production cost of the donated goods. But for C corporations, the deduction can be two times the production cost.
Bertrand and others point out, however, that the donated goods will entitle businesses to a deduction only if they meet requirements laid out in the Internal Revenue Service's tax code. For instance, the donor business will qualify for a deduction only if it hands over its goods to a qualified non-profit organization. Moreover, products that are donated must be targeted at helping disadvantaged or otherwise legitimate groups, such as children, the needy, and people who are ill. Finally, donated goods must be handed over unconditionally; the donor business is not allowed to receive compensation in any form for its largess. Despite these restrictions, analysts and companies that have established charitable giving programs agree that making such donations can have a potent positive impact for the participating business.
In addition to the tax deduction and the reduced inventory-carrying costs, companies realize tremendous public relations benefits from corporate giving. According to the "Cone Corporate Citizenship Study" conducted by Boston-based Cone Inc., 8 in 10 Americans say corporate support of causes helps earn their loyalty to a business. C. J. Prince explains in an Entrepreneur article on the subject that to many entrepreneurs focused "on keeping costs down and milking every cash-flow dollar, corporate giving sounds like a luxury they just can't afford. But in today's competitive environment, corporate charitable programs and partnerships may be the cheapest strategic competitive edge you can get—not to mention the satisfaction they can bring."
Many businesses that choose to direct their excess inventory toward philanthropic targets have come to realize that there are a number of agencies that can help them in this task. In addition to non-profit organizations themselves, which typically try to make the donation process as easy as possible for donor companies, companies interested in handing over goods can enlist the help of organizations known as exchanges. These organizations serve as middlemen, accepting products from companies and then distributing them to various deserving charitable groups. "In addition to finding an outlet for your goods, exchanges supply you with the proper tax documentation, handle distribution, and ensure that the recipient qualifies under the tax code," stated Bertrand.
ORGANIZED GIVING IN SMALL FAMILY ENTERPRISES
Business experts agree that charitable giving is an activity that, when considered by small family-owned businesses, is particularly rife with both opportunities and challenges. The chief pitfall of charitable giving by members of family businesses is lack of communication. All too often each member of a family involved in a business writes out checks to charities of his or her choosing. One may donate to the cancer society, another to the arts, and a third to yet a different worthy non-profit. When the donations are tallied up a lack of direction and consistency in support is often the result. Analysts encourage owners of family businesses to organize their charitable giving in a cohesive way that can benefit both deserving non-profit organizations and the business itself.
Organizing a Strategy for Philanthropic Giving
There is no one organized giving plan that all family-owned businesses should adhere to. Indeed, small and mid-sized family businesses utilize a broad range of charitable strategies, many of which are tremendously effective despite their differences in emphasis, direction, and execution. But most successful giving programs share a common characteristic that is also a hallmark of success in the business arena: proper research and planning. Family businesses seeking to establish a program of charitable giving need to recognize that such policies are predicated on three major issues—choice of charities, size of donations, and the vehicle that will be used to execute donations.
Choice of Charity or Charities—Some family businesses choose to provide financial support only to causes that are personally important to family members, regardless of their influence on the business or industry in which the family is involved. Other families, meanwhile, may choose to steer their charitable giving toward areas that also impact on the family business. A publisher who supports literacy causes, for example, can publicize that connection and boost its public image. A paper manufacturer that supports environmental and deforestation causes may, likewise, create good will in the community.
Of course, many families will discover that agreeing on the primary recipients of a charitable giving program is no easy matter. Some family members may be enthusiastic supporters of a non-profit organization, only to find to their dismay that other members are lukewarm or even hostile to that organization's goals and mission. In such instances, consultants urge individuals not to adopt an intransigent position or engage in "tit-for-tat" negotiations in which approval of a charity is withheld until family members agree to provide financial support to a cause of which they may not be enamored. There are plenty of charities out there to which everyone should be able to agree to donate. In instances where disagreements break down along generational lines, another option is to create a three- to five-year plan in which the causes favored by one generation give way over time to those favored by the next generation.
Deciding How Much to Give
The size of charitable donations that family-owned businesses give is, of course, directly linked to the size and fortunes of the family business. A family-owned lumber business with several locations and a host of reliable corporate clients is obviously going to be able to make larger donations, if it is so inclined, than are the owners of a single sporting goods store. But no matter what the sum total of donations is, family members should make sure that they arrive at the total together and in an informed fashion. That is, organized giving totals should be arrived at with an eye toward the business's current financial standing and its future business plans and prospects. A company poised on the brink of a major expansion effort, for example, may adopt a more modest strategy of organized giving than would a mature business that requires less reinvestment.
Another consideration that members of family-owned businesses need to weigh is their allocation of time to charities. Certain individuals may be enthusiastic supporters of a charity, giving considerable amounts of time and talent to the organization in order to advance its work. Such selflessness is laudable, but it can also give rise to resentments among fellow family members if they begin to feel they are taking on an unfair share of the company's workload as a result. For this reason, family members should make sure that they communicate the needs of the business as well as the charity to one another through regular meetings. Of course, sometimes a business may find that extensive involvement in charitable work can also pay dividends for the company. A hands-on involvement in charitable work demonstrates a tangible commitment to the cause while also allowing for networking with others in the business community.
Choosing a Vehicle for Giving
Many a family-owned business has chosen to establish a philanthropic foundation to guide its charitable activities. This is especially true of families that own larger businesses that can afford to make donations of considerable size. If you intend to donate a very large sum, more than $250,000, there are advantages to setting up a foundation, which is a legal entity recognized under state law and by the IRS as a non-profit corporation. Such foundations are subject to complex rules. Nonetheless, contributions to the foundation are generally tax-deductible, whether they're made by family members or by non-family members who support the foundation's goals. Before committing to a foundation, however, small business owners should consider the various restrictions that apply (foundations are required by law to distribute a minimum of five percent of their net worth to charities every year, for example) and the legal and accounting fees associated with running it.
Another option that some small businesses pursue is the formation of a charitable council. Like individuals, the council can give tax-deductible donations to charities. However, councils are not recognized by or accountable to the IRS and as a result contributors do not receive a tax break on any direct contributions to the council's funds.
Bertrand, Marsha. "Donations for Deductions." Nation's Business. January 1996.
Kahan, Stuart. "Strategies of Charitable Giving." Accounting Technology. January 2000.
Prince, C. J. "Give and Receive: When done right, corporate charitable giving can boost company morale and exposure—as well as your bottom line." Entrepreneur. November 2005.
Saxe, Douglas S. "Discussing Charitable Giving." Business First-Columbus. 22 September 2000.
Stockman, Farah. "For-Profit Businesses Market 'Experience' of Charitable Giving." Knight-Ridder/Tribune Business News. 14 December 2000.
Wilkinson Troy, Carol. "Commentary: Breakdown of Charitable Giving in the U.S." Daily Record, Kansas City, MO. 6 January 2006.
Hillstrom, Northern Lights
updated by Magee, ECDI