Business Development or Charitable Contribution

3/3/2011

By Joseph M. Press, CPA, CFE

Financial institutions are constantly solicited to support and/or sponsor various organizations and events. Once the decision is made to make such an expenditure, a second decision has to be made with respect to recording the transaction. Because of the potential different tax outcomes, deciding between business development and charitable contribution is more than just an academic exercise.

For C corporations, charitable contributions are limited to 10 percent of taxable income before the charitable contribution deduction. Amounts in excess of this limit can be carried forward for five years, but will expire if unused at the end of that period.

For S corporations, charitable contributions are a separately stated item, which means that the deduction is not taken at the corporate level in arriving at taxable income, but is allocated on a pro-rata basis to each shareholder. The individual shareholder then enters the charitable deduction as an itemized deduction on their Schedule A of form 1040. If a particular shareholder does not itemize deductions in their personal return, the incremental tax benefit of the charitable deduction is lost. Also, there are certain limitations on annual charitable deductions based on adjusted gross income.

Business development expenses (not including meals and entertainment) are generally deductible as ordinary and necessary expenses without limitation.

The pivotal issue in determining whether expenditure is a charitable contribution or business development (or some other type of expense) is whether the "donor" receives a benefit or has the expectation of a future benefit. If a benefit is received, the expenditure should be recorded as something other than a charitable deduction.