4 Tax Planning Strategies To Maximize Corporate Donations
The positive impact of corporate giving on employees and nonprofit organizations is by no means the only advantage. The considerable tax benefits of giving through a donor-advised fund (DAF) can support business health too. When an organization can minimize its tax burden through tax deductible donations, there’s a smoother path to long-term growth. Follow these four popular tax planning strategies for achieving that goal.
1. Time Your Donations
No business operates in a bubble. External economic factors affect performance as much as internal decisions. One consequence is that annual revenue (and tax liability) is often inconsistent. There may be windfall years following rapid expansion or sale of assets, or fallow periods when investment outpaces revenue.
One of the big advantages of donor-advised funds is that they allow a business to make several years of contributions in a windfall year, and take the tax deduction up front for that tax year. Focusing contributions on the years with greater revenue can reduce the tax liability. Although contributions cannot exceed 25% of taxable income, the excess is carried forward for a maximum of five years. Crucially, there is no minimum contribution and donations do not have to be disbursed immediately. In other words, the corporation can make the donation now to lock in the tax deductible, without having to decide on where those funds will be allocated.
2. Avoid Capital Gains Tax
Although capital gains tax in the U.S. is relatively modest at 15% or 20%, it could be as low as 0%. Giving through donor-advised funds is one way to achieve that target — again with the possibility of taking the tax deduction upfront.
Selling any appreciating business assets will incur capital gains tax, whether it’s the sale of a business subsidiary, real estate or stocks. Rather than losing 15% of the profits to capital gains tax, corporations can donate the assets to a DAF and still claim a tax deduction (up to 30% of adjusted gross income) at the current market value rather than the purchase price.
That kind of prudent financial management not only builds investor confidence in a board of directors. It also leaves the business with more to invest back into the organization when assets are sold, emerging stronger, not weaker.
3. Avoid Estate Tax
Estate planning is another area in which businesses have the potential to reduce their overall tax burden. As of 2022, any estate valued at over $12.06 million will incur estate tax, and the top rate is as high as 40%. Losing almost half the value of an estate to taxes is hardly an attractive proposition. Fortunately, assets within a donor-advised fund are not included in an inherited estate, therefore are not subject to estate tax. Corporations can remove high-growth assets from their estate by parking them in a DAF, and take the current market value deduction for the tax year in question.
4. Bunch Your Donations
Following changes to tax law in 2017, there’s a significantly less financial incentive for donors to itemize deductions. By contrast, the standard deduction has risen from $6,350 in 2017 to $12,950 in 2022. With that shift in focus comes a clear invitation to bunch donations in a single installment, instead of making them over a number of years. Particularly where a business is close to the threshold, it now makes sense to consolidate funds into a bigger donation in one year to maximize the tax benefits, then take the standard deduction in subsequent years.
Example: A single filer (whether business or individual) whose charitable contributions were “on the margin,” that is, nudging the $12,950 threshold annually, can now consolidate two or more years’ contributions in year one to take a larger deductible, then receive the standard $12,950 deduction in the following year.
Effective Corporate Giving Programs With Groundswell
Groundswell offers a seamless way to make corporate donations simple. With a donor-advised fund, your business can invest the funds in the most advantageous tax circumstances without having to decide when those donations will be granted out. That is for the sponsoring organization to manage. At the same time, the business can take the immediate tax deduction to minimize the tax burden in a given year. Contact us today to see how your business can give better.
How Do Tax Deductible Donations Work for Corporations?
The right for corporations to deduct charitable donations from their taxes was established in 1935. Today, corporate philanthropy is a consistent feature for most of the world’s biggest brands, to the point where corporations donated over $21 billion to nonprofit organizations in 2019. Yet no matter how straightforward the motivation for businesses, the rules surrounding tax deductible donations are complex. Here’s how donations work and which vehicles offer the most compelling benefits.
What Are Tax Deductible Donations?
The fundamental provision of tax deductible donations, as set out under section 170 of the Internal Revenue Code, is that donations to nonprofit organizations with tax-exempt status (see IRC 501(c)(3)) reduce the overall tax burden for the donor corporation within that particular tax year (the IRS provides a useful search tool for looking up the tax-exempt status of an organization). With some exceptions, only funds or foundations within the United States qualify.
Corporations can donate the following:
- Cash: still the most common form of tax deductible donation. Often, corporations will sponsor a charitable event and then match whatever funds are raised by employees.
- Inventory: in the form of supplies and equipment. Tax is deductible on half the difference between the cost of inventory and its fair market value (which cannot be more than twice the cost of the inventory).
- Real estate: rather than selling property and giving the proceeds to a nonprofit (which would incur capital gains in the long term), corporations can donate it to a donor-advised fund (DAF) and receive the current market value tax deduction with no capital gains.
How Do Tax Deductible Donations Work?
The regulations vary for different types of corporation, but some rules apply across the board. Tax deductible donations cannot be for personal or shareholder benefit, for example, so the purpose must be philanthropic. Similarly, contributions must be made before the end of the tax year. Arguably the most important rule, however, is that nonprofit contributions cannot exceed 25% of taxable income (excluding disaster relief). Until recently this figure was 10%, but the IRS extended the limit (temporarily) in 2021 in response to the COVID-19 pandemic. Any excess donations over the threshold are carried forward for five years, after which tax deductions no longer apply.
Deductible donations by corporation:
- C corporations, in which the corporation is taxed separately to the shareholders and owners, are the only business structure that can write off a nonprofit donation directly.
- Sole proprietors have to report nonprofit donations as an itemized deduction on their personal tax return (Schedule A). Donations cannot be deducted on Schedule C, where business income is declared.
- S corporations and partnerships also have to report donations on the individual tax return of each shareholder. In this case, the value of the corporate donation is divided up amongst each shareholder.
No matter what kind of structure a business has, it is required to maintain full records (receipts, registered charity number, bank statements, etc.) of any nonprofit donations to qualify for tax deductions. If the cash donation is over $250, there must be written acknowledgement from the tax-exempt fund or foundation, while for non-cash donations over $5,000 there must be a written property valuation from a qualified appraiser.
What Are the Benefits for Corporations?
While the prospect of a tax write-off, depending on how the business is structured for tax purposes, is a clear incentive, it’s not the only motivation. Donations to nonprofit organizations also foster community goodwill, fortify the corporate mission and improve culture and employee engagement. Increasingly, consumers want to see greater evidence of their favorite brands driving change within their communities, either on a local or national level.
Finding the Right Vehicle for Tax Deductible Donations
Changes to the tax law in 2017 nearly doubled the standard deduction for most individual taxpayers, meaning that there’s now less incentive to itemize deductions as opposed to “bunching” them. As a result, there are even more advantages to donating through DAFs, since these allow corporations to make several years of contributions in a single (typically windfall) tax year.
DAFs also offer some attractive advantages compared to donations through corporate foundations. For a start, there is no minimum annual giving requirement for a DAF and contributions are not publicly reported. That allows corporations to make a larger donation within a single tax year, without having to decide immediately where those donations should be allocated. Because a DAF is managed by the sponsoring organization, the responsibility for disseminating funds does not fall on the corporation, so fewer personnel and resources are required. The corporation just has to establish how much it wants to contribute within the current tax threshold.
For any corporation looking to unlock the financial and brand value of nonprofit donations, Groundswell can provide professional expertise in contributing through a DAF or private foundation. Learn more about boosting employee engagement, supporting the wider community and trimming your next tax bill with Groundswell.
Donor-Advised Funds: Tax Benefits for Givers
Donor-Advised Funds’ tax benefits are widely known and well documented, and are one reason why the popularity of DAFs has surged in recent years. However, how do DAFs actually work, and what tax benefits do they create? Let’s get into the nitty gritty.
How DAFs Work
A DAF allows a donor to contribute a sum of money into an account held with a sponsoring 501(c)3 nonprofit organization, such as a public foundation, and take an immediate tax deduction in that tax year.
One of the benefits of Donor-Advised Funds is that donors can then take their time in determining when and where to grant those funds to recipient charities. This ties to the key Donor-Advised Funds tax benefit – it allows a donor to disaggregate their decision to optimize their tax deduction from their decision about which charities to support and how. (However, note that this charitable giving tax deduction has also opened DAFs up to legitimate criticism that they serve primarily as a tax avoidance vehicle, and only secondarily as an effective tool for philanthropy. See here for more.)
DAFs also provide donors the ability to donate non-cash assets such as appreciated stock, real estate, and collectibles such as art – all as a form of charitable donation tax credit. With thoughtful and well-advised planning, donors can reap the Donor-Advised Funds tax benefits while simultaneously increasing the amount they contribute to charity by utilizing these non-cash donations.
A Typical DAF Scenario
Here’s how tax deductions for contributions to Donor Advised Fund work:
If a donor has held an asset such as a stock for more than one year, the donor can contribute that stock to their DAF. The sponsoring foundation that controls the DAF then liquidates that asset (sells the stock), making the full value of the sales proceeds available for that donor to recommend to a charity.
By taking this approach, the donor has avoided paying the entirety of their capital gains tax obligation – which is either 15% or 20% at the time of this writing, depending on the donor’s income level.
Even better, the donor is able to deduct the full fair market value of the asset at the time of transfer into the DAF, significantly reducing taxable income.
Let’s look at the math.
Let’s imagine a donor, we’ll call him Phil Anthropy, bought 100 shares of Apple stock at $5 (don’t you wish you bought Apple for that price now!). This gives Phil a cost basis of $500 for that purchase. If five years later Apple is now worth $50 per share, Phil now owns $5,000 worth of Apple.
Now imagine it’s the end of the year and Phil wants to make a $5,000 donation to his favorite charity. If he doesn’t have the cash, Phil’s first option is to sell his Apple stock for $5,000. When he does this he’ll immediately incur a capital gains tax on his appreciated value – which is $4,500 ($5,000 current value minus the $500 cost basis). If Phil’s capital gains tax rate is 15%, his capital gains tax bill will be $675. It also means that Phil only has $4,500 to give to charity!
The Math of DAF
Next, let’s assume that Phil has a Groundswell account, which is powered by a Donor-Advised Fund. In this scenario, Phil can contact Groundswell to transfer his Apple stock directly into his DAF. Once received, Groundswell sells the position for $5,000 and puts that cash in Phil’s account. Phil then recommends a grant to his favorite charity for the full $5,000. In Scenario 2, Phil pays zero capital gains taxes and is able to deduct the full fair market value of the stock – $5,000 – off his income taxes. That’s a $500 higher deduction than scenario 1 ($5,000 vs. $4,500).
As you can see, Scenario 2 both gives more money to charity and saves nearly twice as much money in taxes. We enjoy the usual Donor Advised Funds tax benefits – and we do more good.
But there is actually a third scenario, and in this scenario the donor gets the best possible outcome: they still give a significant sum to charity and they pay zero taxes. In Scenario 3, a donor works for a company that has implemented a modern day, decentralized approach to its corporate philanthropy.
DAFs & Philanthropy-as-a-Service
With this Scenario 3, a company has chosen to make charitable giving a component of its total compensation or total rewards approach. In this scenario, Acme Corporation understands that its employees, like Phil, are likely already giving a portion of their take-home pay to charitable causes.
Knowing this, Acme Corporation has decided to implement a Philanthropy-as-a-Service solution, like Groundswell, to decentralize corporate giving and provide Phil with an annual charitable giving allowance. Using Groundswell, Acme deposits $5,000 annually directly into Phil’s Groundswell account, which Phil can then direct to the charity of his choice.
The Donor-Advised Fund tax benefits here are astounding. Because the $5,000 is deposited directly into Phil’s DAF – and is never received by Phil as actual income – Phil never has to pay payroll taxes on the funds. The US Federal Government assesses payroll taxes on all earners, and some states pile on additional tax requirements. Current federal payroll taxes for individuals are 7.65% (6.2% for Social Security and 1.45% for Medicare). This means that Phil isn’t responsible for paying the $382.50 in payroll taxes that would have been automatically withheld from his paycheck.
Here, Acme Corporation gets the charitable tax deduction because the contribution to Phil’s Groundswell account qualifies as a contribution to a 501(c)3 public charity, while Phil gets to feel great about sending a big donation to his favorite cause.
Leveraging DAFs, the Groundswell Way
- The key Donor-Advised Fund tax benefit is providing donors a simple, tax-advantaged vehicle to streamline their charitable giving and ensure their deductions are fully accounted for
- Donor-Advised Funds offer incredible opportunities to contribute non-cash assets such as publicly traded equities, creating increased tax advantages for the donor and extra revenue for the nonprofit
- Companies that choose to decentralize their philanthropy can provide employees with a significant financial benefit by contributing funds directly into an employee-held DAF, allowing the company to take the tax write-off and the employee to still make meaningful donations to their favorite charities