Charitable Giving

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.

 1 | 2  NEXT