How the Tax Cuts and Jobs Act Affects Corporate Giving

We were recently asked: can businesses deduct donations to charity?

It's a great questions and, of course, the answer is, "It depends," because corporate tax law around charitable deductions is a little weird, and thanks to the Tax Cuts and Jobs Act of 2017 (the "TCJA"), most business donations and sponsorships are ultimately non-deductible.

Individual taxpayers can deduct the non-commercial value of their contributions. So, for example, if a $500 donation comes with two tickets to a charity gala valued at $150 each ($300 total), the individual donor can deduct $200 of their contribution. The issue is that, beginning with 2018 under the TCJA, the IRS raised the standard deduction such that most people now do not have enough deductions to itemize anyway. As a result, fewer individuals are giving their money to charities. As individual donations to charities decline, non-profits are looking to businesses to bridge that gap.

The only business entities that can directly deduct charitable contributions and sponsorships as a business expense are C-Corps. Any in-kind services provided by a C-Corp (including reduced-cost services) are considered donations at their cash value. So basically, the corporation takes the tax deduction on its own corporate tax return.

Other non-profits can make donations to like-minded charities so long as it serves their charitable purposes. Cash contributions and sponsorships from one non-profit to another are regarded as grants, and in-kind services provided are regarded as direct support.

So here's where it gets weird:

Sole proprietorships, partnerships, LLCs and S-Corps (what the IRS calls "pass-through entities") that make cash donations or sponsor charities do not get a deduction at all. Instead, the deduction passes through to the business owner's individual tax return. The business owner gets to list the part of the cash donation or sponsorship that benefits their business (such as the value of advertising they receive) as an "ordinary and necessary business expense." The remainder of the donation that did not directly benefit the business is a "charitable deduction." The kicker is, the business owner only gets those deductions if they exceed the standard deduction and get to itemize deductions on their personal tax return. Weirder still, a pass-through entity that donates in-kind services to a 501(c)(3) gets no deduction whatsoever for the value of its services.

This weirdness makes a little more sense if you understand that pass-through entities are not taxed directly. Small businesses are typically pass-through entities, and a pass-through entity's income, losses, and deductions all get passed through to the owners of the business in proportion to their ownership interest. The end result is an unintended consequence of the TCJA: fewer donations will be itemized and deducted by small business owners, and their incentive to donate to and sponsor charities is getting thin.

Meehle & Jay and Suzanne have been our counsel for Echo Interaction Group since the inception of our company. Her guidance has gone above and beyond the typical small tech business attorney and she's become a trusted advisor to our firm. Her knowledge of small business legal needs and specifically in the technology and startup world have been crucial to the growth of our company.

Carlos Carbonell, CEO, Echo Interaction Group

I couldn't be happier with my decision to hire Meehle & Jay as our entertainment attorneys!  When you deal with a lot of people, it's critical for a business to have all of their i's dotted and their t's crossed, and it's huge relief to know that Meehle & Jay is doing that for us.

Rob Henlon, Fierce Entertainment 

I use Meehle & Jay to represent my Event Planning Business and they are nothing short of phenomenal. Not only do I get email reminders to make sure I am staying on top of my legal priorities, the professional advice they have offered me, in conjunction with their legal expertise, makes me feel confident that I can do business competitively while still having my assets and reputation protected.  A class act all the way around.

Michelle Widmer, Founder & Director of Events, The Empress Table

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Rodney E. Luke, President, Luke Brothers Custom Homes

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