Fun Asia Show Recording-December 12, 2013

Turning Charitable Contributions into Advertising Expenses

Tax Issue

Charitable contributions made by businesses do not receive the same tax treatment as advertising expenses. Contributions are subject to various limitations and restrictions at both the entity and personal tax level. Carryovers are generally limited to five years and unused deductions are forfeited. Partners, S corporation shareholders, and sole proprietors deduct charitable donations on Schedule A.  Any tax benefit depends on the taxpayer’s marginal tax bracket, potentially resulting in unequal tax treatment among shareholders or partners. The charitable contribution loses its vale as a tax deduction for individuals who don’t itemize. In contrast, amounts spent by businesses for advertising generally are fully deductible by the business.


Applicable Tax Law

  • Only contributions to qualified charitable organizations, listed on the IRS website at, may be considered for a charitable contribution deduction.  All of the rules for recordkeeping, substantiation, and done acknowledgements that apply to individuals also apply to businesses.
  • C corporations may deduct charitable contributions up to 10% of taxable income, computed without considering deductions for the charitable contribution, dividends received, section 249 bond premiums, and domestic activities, or NOL or capital loss carrybacks.
  • The deduction for contribution of property by a C corporation is generally limited to the adjusted basis or the property. An exception exists for donation of inventory. The qualified organization must use the donated inventory solely for the care of the ill, the needy, or infants, and must provide a statement to the C corporation to the effect that the inventory will not be transferred in exchange for money, services, or other property. In this case, the C corporation may increase its charitable contribution deduction by one-half the amount that would have been ordinary income had the inventory been sold, but limiting the deduction for the donated inventory to no more than twice its cost. Similar exceptions are in effect through 2011 only for food inventory, computer technology, and book inventories.
  • Charitable contributions that are unused by C corporations because of the 10% limit may be carried forward for a maximum of five years, but may not be used to increase an NOL carryover. Charitable contributions that remain undeducted due to those restrictions are lost. In particular, they may not be deducted as business expenses. (Reg. 1.162-15)
  • Individuals deduct charitable contributions on Schedule A, Itemized Deductions. Contributions deducted on Schedule A may have been made personally by the taxpayer, by the taxpayer’s sole proprietorship, or by an entity taxed as an S corporation or partnership that passes the deduction through to the taxpayer on a K-1.
  • Total charitable contributions deducted by individuals as itemized deductions are generally limited to 50% of the taxpayer’s adjusted gross income. Limitations of 30% and 20% of AGI apply in certain situations.
  • Charitable contributions that are unused on Schedule A because of the AGI limitations are carried over for a maximum of five years (other than qualified conservation contributions). Carryover contributions retain their character as 50%, 30%, or 20% limit contributions, with oldest amounts deducted first after current year charitable contributions.
  • Taxpayers who do not itemize deductions in a carryover year must reduce the carryover amount by the amount that would have been deductible had the taxpayer itemized. Charitable contributions that remain undeducted due to these restrictions are lost.
  • Business entities, including sole proprietorships, may deduct costs to advertise a business product or service as ordinary and necessary business expenses. Any limitations are imposed on net business loss rather than on the advertising expense.
  • Charitable organizations with gross income of $1,000 or more from unrelated business activities must file Form 990-T, Exempt Organization Tax Return. Unrelated business income tax (UBIT) is assessed at corporate tax rates. If the organization is a trust, then trust tax rates apply instead.


Tax Planning Strategies

  • A C corporation can make a donation of inventory or other qualifying property. Such items are often labeled with company information, serving as a de facto advertisement. If the conditions are satisfied, the C corporation can claim a deduction that is greater than the basis in the donated inventory or property, subject to the usual 10% limitation for C corporations.
  • Contributions to a qualified organization may involve the purchase of advertising space, display of company information at organization events, inclusion in a directory, etc.  If the organization uses the contribution in such a way that the business in promoted instead of merely including the company name on a list, the business has purchased advertising.
  • Pass-through entities and sole proprietorships can reduce taxable pass-through income (and AGI of shareholders, partners, and owners) while assisting qualified organizations by buying advertising and sponsoring organizations efforts. Deductible advertising costs can also reduce income subject to self-employment tax for sole proprietorships and partners.
  • Donations to nonqualified organizations may qualify as advertising expenses.


Possible Risks

  • The charitable organization and the business may have conflicting interests in the classification of donations. The business may want to report an advertising expense instead of a donation. But, a charitable organization generally does not pay tax on outright contributions. Receipts from the sale of advertising may be classified as unrelated business income, subjecting the organization to unrelated business income tax (UBIT).
  • The IRS may reclassify business advertising as a donation, or vice versa. For example, the IRS could determine that expenditures that are supposed to be for advertising may not actually be made with a reasonable expectation of financial return to the business.
  • Donations that benefit individuals instead of qualified organizations are not deductible as charitable contributions. If such donations do not also promote the donor’s business, they aren’t advertising expenses either.


Court Cases

A State Police Association was a labor organization exempt from taxation and thus a qualified organization under the rules of IRC section 170(c). In order to raise money and pay for an annual yearbook, the Association contracted with an outside company to do funds solicitations. The Association reported all money realized through this effort as contributions. The yearbooks included two sections: one containing articles and editorials, and the other containing display ads. The display ad section included advertisements and an alphabetical index of donors similar to that found in telephone directories.  The IRS determined, and the Tax Court agreed, that the Association had been in the business of selling advertising and was not merely soliciting tax-deductible contributions. The intent of the donors did not matter. The donors received advertising benefits in exchange for their contributions. The advertising was unrelated business income and the Association was subject to unrelated business income tax. In addition, the donors lost their charitable contribution deductions and had to recalculate net business income for the years in question. (State Police Association of Massachusetts, T.C. Memo 1996-407)