In 2019, corporations donated a little over $20 billion to charity. But how exactly are they incentivized to give, apart from doing good in their communities? We discussed the tax benefits of corporate giving with Jon Liff, a CPA at our partner Edelstein, LLP, to get a better understanding of how your corporation can benefit from proactive giving.
Whether you are looking to start or modernize your giving program, here are four tax benefits of corporate giving to keep in mind.
#1 There is currently an increased percentage for charitable giving that is allowable for deduction
As a shift in the marketplace has made it fundamental for corporations to give back, it’s important to know the benefits from a tax perspective. Corporations are able to receive a qualified charitable deduction when they donate to any 501(c)(3) organization. They typically get up to a 10% deduction of their taxable income. However, as described under the CARES Act implemented in 2020, Jon explained, “A big change in the tax law as it relates to corporations and corporate giving right now is the increased percentage that is allowable for deduction. The CARES Act increased the 10% limitation up to 25% of a corporation’s taxable income for tax year 2020 and this percentage has been extended through 2021 under the Consolidated Appropriations Act.”
For example, if a corporation has $100,000 of taxable income and they make $100,000 worth of donations, they can deduct up to 25% or $25,000 in 2021. Under the same scenario, companies would be able to deduct up to 10% of that or $10,000 in the years after 2021. Any amount not deducted due to limitations would get carried over for 5 years. Knowing the deduction and how it changes, can help you plan your corporation’s giving this year and the years to come.
#2 Donor Advised Funds give you more flexibility to make an impact
No matter how big or small your corporation is, a Donor Advised Fund (DAF) is a charitable giving vehicle you can utilize to give your corporation flexibility in its giving. Since donations are not tax deductible unless they are donated to a specific 501(c)(3) organization, DAFs are managed by 501(c)(3) organizations so you can make a donation and get the deduction for your corporation right away. “Donor Advised Funds are a useful tool for both companies and individuals. DAFs allow the donor to take a charitable deduction in the year amounts are contributed to the fund and then decide what charity to contribute those funds to at a later date. The timing of the deduction is the biggest advantage,” Jon said.
For this advantage and its flexibility, DAFs are being used more and more for corporation accounts and their employees’ giving accounts. National Philanthropic Trust’s 2020 DAF Report shows the number of DAFs increasing, while the size of them are decreasing. This can be the result of the rise of workplace DAF giving accounts and the use of sponsoring organizations. Our philanthropic technology, Philantech, responds to this shift by offering accessible DAF accounts to empower your corporation and employees to easily donate more money to charity.
#3 Donations to an employee relief fund can be deductible contributions
Employee relief, or directed individual relief, funds are funds that can be established in response to a disaster, that allows a corporation to collect donations and distribute the money to employees in their community that have been affected by said disaster. Since these funds are managed by a 501(c)(3) organization, donations to these funds are considered tax deductible. In other words, your corporation would have to donate directly to the fund, and not directly to the employee, for the donation to be considered tax deductible. And, in turn, the employee would apply for a grant from the fund, and, if approved and processed through the right channels, take that grant as nontaxable income and it’s exempt from W-2 reporting.
In 2020, corporations were very active in establishing employee relief funds, as it is an easy way to show your employees you are working to help them during a difficult time. Jon explained how tax law was changed to reflect this need, saying, “From January 2020 to February 2021, corporations were able to set up disaster relief funds and the contributions to individuals through relief funds are tax deductible. For the individual recipient, the income would not be taxable and would be exempt from all W-2 reporting requirements.” As you prepare your corporation to be proactive in giving and the needs of your employees, establishing an employee relief fund is a great first step when challenges arise.
#4 Both the employee and the corporation benefit from a matching program
Considering 84% of survey participants say they’re more likely to donate if a match is offered, a match program is a great example of how you can offer a tax benefit to both your corporation and your employees. In a typical 1:1 match program, when the employee donates to charity, they get a write off on their end for how much they donated. And your corporation will receive a deduction for the same amount they contributed to the match, decreasing the corporation’s taxable income.
Additionally, a matching program is about more than just pushing donations to charity, as corporations have started to treat it like an employee benefit. “I think a matching program is a great opportunity to get your employees involved. Yes, you are giving back to your community, but there is also a social aspect to it. Employees feel as though their company is being more involved and that they are able to give their charity of choice a bigger donation since their company will be matching,” Jon said. It’s an opportunity to get your employees involved by showing them your corporation supports the causes they care about.
As you establish or modernize your giving program, the tax benefits for both your corporation and your employees are not just a great incentive, but gives you the ability and flexibility to push more donations to charity, developing your brand and doing good in your community.
We’d like to thank Jon for his helpful insight and perspective on the tax benefits of corporate giving. And we’re here to help you rethink your corporate giving program to make the most of your impact.