Charitable Donations as a Business Expense

We have all seen various businesses advertise that they will donate a percentage of sales to a particular cause, typically to a charity.  Many assume that such donations are deducted as charitable contributions.  For a sole proprietorship or flow-through entity, charitable contributions do not reduce income subject to employment taxes, and for a “C” corporation the deduction is limited to 10% of net profit.  But are these in fact charitable contributions?

A Chief Council Advice (CCA) memorandum addressed this very issue.  The conclusion was that such payments are not charitable contributions but rather ordinary and necessary business expenses.  This is a very favorable decision, because an ordinary business expense is deducted against profit just like any other, without any limitations associated with a traditional charitable contribution.

Such a position is very much based on facts and circumstances, and most importantly the intent of the business.  A business that has a reasonable expectation of financial gain from making the contribution (for instance, attracting more customers), and can document that expectation, will have a much easier time defending ordinary expense deduction treatment for these contributions.

CCAs are written advice prepared by the Office of Chief Council conveying interpretations tax provision to assist IRS personnel.  A CCA cannot be cited as authority for taking a particular tax position, but does indicate thought process.  Thus, care should be taken when adopting a position based on a CCA.

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