In a General Information Letter dated June 2, 2016, the Internal Revenue Service (IRS) announced that a benefit corporation can deduct contributions to charities as business expenses when the payments are for institutional or goodwill advertising to keep the corporation’s name before the public. Benefit corporations now have a tax advantage over an average C Corporation since these contributions can now be treated as business expenses which provides an immediate dollar for dollar reduction of taxable income. Some may consider this guidance significant because it allows benefit corporations to make donations or payments to charitable organizations greater than the current 10% limitation on corporate charitable contributions. I would argue that this position merely expands on the IRS’s position on the treatment of sponsorships of charitable organizations.
For the benefit corporation movement, this General Information Letter recognizes that benefit corporations exist, and those that have elected giving to charitable organizations as their specific benefit purpose can maximize giving beyond the corporate limits.
Historically, benefit corporations have been subject to the same federal income tax rules as other corporation types. This has meant that all of an organization’s charitable contributions were deductible under Section 170 (with the 10% limitation), while all of an organization’s business expenses were deductible under Section 162 (not limited). There has long been controversy over what corporate expenses fell under Section 162 and what fell under Section 170. Since the proliferation of benefit corporations, for-profit businesses that may elect to embed charitable giving in excess of federal limits in their charters, this issue has been amplified.
The IRS’ response has clarified this tax issue for benefit corporations. To the extent a benefit corporation has focused on a social by sharing model, donations to charitable organizations will generally be considered a form of institutional or goodwill advertising and thus will be classified as business expenses deductible under Section 162, not Section 172. However, benefit corporations will need to document that their contributions are made primarily for business, not donative purposes. Examples of the business purpose of charitable contributions include generating goodwill to raise business profile in order to:
- Increase sales
- Improve client retention
- Improve employee retention
- Attract talent
These business rationales should be documented in corporate minutes, the transmittal letter to the recipient, and all other relevant documentation.
Ironically, this limited guidance from the IRS might actually undercut the benefit corporation movement. Many have said that benefit corporations are merely marketing gimmicks thought up by millennials to move goods. By expressly endorsing the treatment of charitable contributions by benefit corporations as marketing expenses, the IRS has signaled that it, too, considers benefit corporations to be marketing vehicles and not agents for change. I predict many more companies that actually sell brands and not goods will jump on the benefit corporation trend since it now makes good business and tax sense to do so.