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LEGAL ISSUES

Sweet Charity

With the help of federal tax laws, Warren Buffett and Richard Branson aren't the only entrepreneurs who can afford to donate to a good cause.
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Warren Buffett is an excellent, but not the only, example of organizational giving these days. Corporate philanthropy has grown over the years to become an integral part of many firms’ business plans. Giving not only allows a company an opportunity to support a favored cause, it also provides an opportunity to build goodwill among employees and customers as well as a strong, positive public image.

While not every CEO can give away $3 billion like Richard Branson of the Virgin Group, that shouldn't stop entrepreneurs from considering smaller but no less meaningful ways to give.  And, believe it or not, there are federal tax laws that support and promote charitable outreach. Here's a few options.

Donate inventory
Tax laws encourage businesses to give from their inventory to certain special causes and rewards them for this effort. While deductions for inventory donations are usually limited to the item's value minus any gain that would have been realized if it had been sold rather than donated, certain inventory donations result in an enhanced deduction. This is the usual allowance enhanced by 50 percent of the difference between the basis (usually its cost) and the fair market value of the item, but no more than 200 percent of the item's basis. The enhanced deduction applies to:

  • Any inventory items donated by C corporations to public charities for the care of the ill, needy or of infants.
  • Scientific property used for research donated by C corporations to an institution of higher learning.
  • Book inventory donated by C corporations on or after August 28, 2005, and before January 1, 2008, to public schools (grades K-12).
  • Food inventory on or after August 28, 2005, and before January 1, 2008, to a public charity. The food must be "apparently wholesome" (intended for human consumption) and meet all quality and labeling standards. This break applies to any business, such as a farm operated as a sole proprietorship or a grocery store run as an S corporation.
    (Note: The enhanced deduction for donations of computers by C corporations to schools and libraries expired at the end of 2005. It is expected to be extended retroactively for 2006.)

Encourage Employees
Companies can also use various methods to help employees with their personal charitable giving:

  • Match employee contributions. Companies can set up a matching program within set limits for donations to approved charities, such as the AmeriCares or the American Cancer Society. The limits are within the company's discretion--usually a dollar-for-dollar match or a percentage match up to a set limit (e.g., full matching for an employee's donation up to $2,000, so if an employee gives $3,000, the company gives $2,000). Companies can deduct their matching contributions within the limits of the law (e.g., C corporations can deduct contributions up to 10% of their taxable income, with excess contributions carried forward for up to five years).
  • Sponsor workplace fundraisers. Some national charities, such as the United Way, hold annual campaigns to obtain contributions from businesses. This is a no-cost way for a business to help a charity. It simply arranges for payroll withholding to benefit the charity to the extent to which each employee agrees.
  • Enable volunteerism. Companies can help employees support their favorite causes by giving paid leave. This may lead to some lost productivity for the company but the return on investment - a satisfied employee, an appreciative charity and positive public relations - is invaluable.
  • Disaster-leave banks. The IRS has created a way for companies to allow employees to donate their unused personal, sick and vacation days to other employees affected by a disaster (an event causing severe hardship to an employee or family member that requires the employee to take time off from work). A written plan must be used for this purpose. Again, this arrangement is a no-cost way in which a company can foster a sense of community within the company.
               
    For more about tax breaks for charitable giving, see IRS Publication 526, Charitable Contributions, at www.irs.gov.

Last updated: Oct 1, 2006

BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.
@barbaraweltman




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