IRS Allows Payments to Charities as Deductible Business Expenses
In a recently issued Chief Counsel Advice (CCA), the IRS ruled a business that prominently advertised about donating a percentage of its sales to organizations promoting certain social missions could deduct those donations as ordinary and necessary business expenses rather than charitable contributions.
The CCA explained it’s irrelevant whether some of the payments were made to nonqualified charitable and educational tax-exempt organizations or for-profit entities with a social mission included in their corporate bylaws. In either case, such payments may be deducted as ordinary and necessary business expenses. The IRS conclusion was based on the fact that the business had a reasonable belief the program would increase and enhance its business.
The ruling is favorable to the taxpayer in question because ordinary and necessary business expenses are not subject to the deduction limitations placed on charitable contributions. For corporate taxpayers, cash contributions to qualified charities generally are limited to 10 percent of modified taxable income. Any excess corporate contributions are eligible for a period of five tax years; however, current-year contributions take priority over carryover contributions.
Deduction limitations also apply to cash contributions by individual taxpayers, including individual owners of pass-through entities. These taxpayers generally are eligible to report an itemized deduction for cash contributions to qualified charities as long as the contributions do not exceed 50 percent of the taxpayer’s adjusted gross income (AGI). Like corporate taxpayers, any excess contributions are eligible for a five-year carryover period, but current-year contributions take priority over carryover contributions. Also, to the extent individual taxpayers can treat a contribution as an ordinary and necessary business expense, the deduction reduces AGI. This treatment may prove beneficial to individual taxpayers affected by various unfavorable AGI-based tax provisions, such as the AGI phaseout rules related to personal exemptions and itemized deductions.
While the CCA is limited to the taxpayer in question and may not be used or cited as precedent, it does signal a possibly favorable outcome for similarly situated taxpayers. To learn more, contact your BKD advisor.