How Small Businesses Can Optimize Their Charitable Giving Strategies
Doing good is good for business. We’d like to say, “This goes without saying,” but it’s important to acknowledge all aspects of this fact.
Small businesses play a key role in charitable giving, because they fill the gaps left behind by big corporations that tend to focus on national and international charities. Small business brings charitable giving home to the local community. By supporting local charities, small businesses create loads of goodwill with their customers and their employees, all the while gaining visibility with the communities that matter most to the success of their business.
What’s not to like?
And yes, there are tax benefits, and that’s great for improving the financial side of an already win/win interaction. In this blog post, we’ll talk about how to approach tax-efficient charitable giving strategies and how to size up the options for when to give (and how to give).
Choosing Charities That Do Good
There’s certainly no shortage of great choices here. Some of the most popular charities that small businesses can donate to include:
- Local youth organizations
- Local first responders
- Local service groups (Scouts, Rotary, Boys & Girls Club, etc.)
- Local religious organizations
- Food banks/Soup kitchens
Overall, over 75% of small businesses make charitable donations each year, with about 2/3 of those donations going to local charities.
Deciding which organization(s) get your donation is personal to each business. Focus on the groups and causes that resonate most with your customers. Increasing customer loyalty is mission-critical to any small business, and there are few better ways to accomplish that than by engaging with charities that align with your customers’ values.
So, follow your instincts — and seek your customers’ feedback directly if it helps the process. Ask your people about charities that are meaningful to them. Charitable giving vastly improves employee morale and retention, which saves your business time and money (the most precious commodities around). The overarching goal here is to find synergy between the mission of the charities you choose — and the mission of your business itself.
More on the Selection Process: Trust but Verify
It’s crucial that any donations you make go to bona fide 501(c)3-designated charities. Without that official designation, you won’t be able to take any tax deductions.
You can verify a charity’s status right on the IRS website. Any charitable organization that’s well established will likely have the paperwork you need for easy tax preparation and recordkeeping.
For small businesses and local charities especially, it’s good to spend some extra time on due diligence. Ideally, you’re looking to build networks and partnerships — not just drop off a check. Call up the charity directly or send them an email to get in contact with an executive director or fundraising director. Check out their website and get to know their goals and ongoing projects and events in the community. You’ll want to speak with them about the kind of giving you could potentially give year-round, whether it’s employee volunteer time, event sponsorship, or community outreach.
When and How to Make Charitable Donations
The holidays are the time of year everyone thinks the most about charitable giving, but it’s a good idea to plan out an annual budget for the year and spread the donations out.
Giving regularly helps you manage the books with more intention. It can smooth out your cash flows and maximize your tax efficiency. Giving on a regular basis can also save you hassle as the IRS will be more inclined to scrutinize a one-time donation. It’s also just a smart way to leverage the PR aspect of charitable giving. After all, there’s no reason to limit your increased visibility by just giving at year’s end (when everybody else is out there trying to do the same thing). Finally, remember that regular or scheduled donations allow your charity of choice to do their own planning — because they can build a reasonable projection of the funds they can expect throughout the year.
One more note about where and how you claim your donations. Individuals can claim their charitable donations on Form 1040, Schedule A. If you are filing Form 1120 as a partnership or an S-Corp, charitable contributions go on Schedule K-1.
How much to give? There’s no right or wrong answer here. We believe that to give anything is a blessing to those who receive it (while also building positive momentum for your business).
As you think this through, keep in mind that there have been some big changes to the charitable giving portions of the tax code via the Tax Cuts and Jobs Act of 2017. The law has made it trickier to obtain tax deductions for one-off payments. However, there is a valuable work-around in the form of donor-advised funds, where you place a lump-sum each year into an account that will distribute your charitable donations throughout the year. If you don’t allocate all the funds, you can even spread them out over several years and still get the deductions.
How Small Businesses Can Optimize Their Charitable Giving Strategies
Recent changes to the tax law have highlighted the need for professional tax advice. It’s hard to keep up with the value of cash donations vs. physical goods or equipment, food and clothing donations, etc. There are different classifications of the maximum amount that can be donated based on the charity and the net income statement of your business (generally capped at 50% of your company’s adjusted gross income before accounting for tax loss carryforwards).
In other words, if you are getting serious about charitable giving, it’s wise to form a partnership with a tax professional who focuses on small businesses. Reach out to the team at TreMonte to discuss how charitable giving fits into your overall tax picture. We can help you get the most after-tax impact to your bottom line while also deepening your relationships with the local community.
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