Giving Back To The Community:
Small business owners can point to many different factors that have played a part in their success: skill, training, education, mentorship or marketing savvy, just to name a few. But almost every owner would acknowledge one common success factor — the support of the local community.
Ivan Misner, founder and CEO of Business Network International, sums up the feelings of most successful small business owners: “I feel that I have an obligation to give back to the community from which I draw, and I have felt that way ever since I started in business. Sure, it’s good for recognition and PR, and there are tax breaks, too. But most importantly, it just feels good, and it’s the right thing to do.”
How To Give Back
You may have been thinking about giving back, but you aren’t quite sure exactly how to go about it, or what the tax implications may be. For starters, look to the organizations and causes that you’re already personally involved with or interested in, like your place of worship, your kid’s school, a community foodbank or maybe research into cancer or some other disease. A few ideas:
Serve on an organization’s board of directors. Most small business owners can offer valuable expertise to an organization’s board of directors. The best way to get on a board is simply to meet with the organization’s leadership, describe your particular expertise (like finance or marketing, for example) and ask how you can best contribute. Most boards of directors of charitable organizations meet monthly for an hour or two, and then there is usually a commitment of anywhere from two to 10 or more hours a month of additional voluntary time.
Donate your expertise and services to an organization “pro bono.” If you provide a professional service, like legal or accounting services, you can perform services for a charitable organization free of charge. This is what’s known as “pro bono” work. Note, however, that the value of services donated is not tax-deductible (although you can deduct any costs you incur in providing services).
Participate in fundraisers or sponsorships. You can use your business platform to help provide more visibility to an organization’s fundraising efforts, perhaps by promoting them at your place of business to your customers. Or consider local sponsorships, like Little League teams, special concerts or performances, or other events.
Establish matching gift programs for employees and/or customers. “This is a great way to support your employees and clients in their charitable endeavors and build goodwill with them,” says David Geller, CEO of GV Financial Advisors in Atlanta. He notes that his firm supported 32 different charities last year through matching gift programs.
Donate property or inventory. You may choose to donate used property or equipment and slow-moving inventory to charitable organizations. The deduction for a charitable contribution of ordinary income property (i.e., property used in your trade or business, such as automobiles, computer equipment, fixtures and furniture) is determined by reducing the fair market value of the property by the amount of ordinary gain you’d have realized if you sold the property at fair market value. The deduction for inventory is the lower of fair market value or your cost basis in the inventory.
Donate money. Simply donating cash may be the most obvious charitable giving tactic, but it’s not always the most tax-efficient way to give, says Geller. “If you have appreciated property or securities, it’s always better to donate these rather than cash. For example, let’s say you have stock you bought five years ago for $500 that’s now worth $1,000. If you donate the stock, you’ll receive a deduction for $1,000 and avoid paying taxes on the $500 capital gain. If you want, you can buy another $1,000 in the same stock the next day and then have a $1,000 basis in the stock.”
Forming A Community Foundation
In practice, donating appreciated property or securities can get cumbersome if you’re making multiple gifts in small amounts throughout the year. This is why many financial advisors recommend establishing a donor-advised account through a community foundation.
You make tax-deductible contributions to your foundation account whenever you want, in whatever amounts you want (after a $10,000 initial contribution). If you choose, you and other business owners can pool the initial contribution and make it together in a shared foundation. Community foundations receive legal control of the funds contributed, but they’re obliged to make contributions as you direct as long as the entity is a qualified 501(c)(3) charity (as defined by the IRS) or a public school. (Note: Appreciated securities donated to community foundations must have been held for at least one year to qualify for long-term capital gains status.)
Misner says he wanted to set up a charitable foundation for his business, but was dismayed to find that starting up a new foundation generally requires an initial pot of no less than $1 million. “Then an associate told me about community foundations. I started the BNI-Misner Charitable Foundation four years ago with $10,000 and the account is now up to $125,000 contributed by my company and members of BNI. We donate the money to various charitable causes mostly in mini-grants of $500.”
One of the main benefits of establishing a community foundation, says Misner, is the flexibility it gives you. “For small businesses especially, some years are better than others, so it’s not always easy to match giving opportunities with a time when you have the money to give. With a community foundation, you can contribute funds when you have them so they’re there when the best giving opportunities arise.”
Tax Talk
Of course, when making charitable contributions of any kind, you want to make sure you follow all of the rules so that you receive the greatest tax benefit. Following are a few of the most common questions from small business owners when it comes to taxes and contributions and answers from Mike Stravin, a tax manager with the CPA firm Wolf & Company in Boston:
For small businesses, are charitable contributions made at the individual or corporate level? “If you’re a sole proprietor, you’ll deduct contributions on Schedule A (itemized deductions), which you file with your individual tax return (Form 1040),” says Stravin. “S corporations report the contributions on the corporate return (Form 1120S), but the deductions actually flow through to the individual shareholders, who report them on Schedule A.”
What are the annual limits for charitable contributions? “Contributions for both sole proprietors and S corporation shareholders are generally subject to an annual limit of 50% of adjusted gross income (AGI), or 30% of AGI for donations of appreciated property,” says Stravin. He adds that contributions that exceed this amount in any year can be carried forward for five years.
How do I make sure a charity I want to contribute to is a qualified charity under IRS rules? Qualified charities are classified as 501(c)(3) organizations by the IRS. When making a donation, you should ask whether the charity is a qualified organization and they should be able to tell you. Stravin says that IRS Publication 78, published annually, lists most qualified charitable organizations. “If the organization is not listed or if you have any doubts, you can simply ask the organization to provide a copy of their IRS determination letter.”
What kind of documentation should I keep to substantiate contributions that are deductible? “For any cash contributions of $250 or less, you should keep a copy of the cancelled check or credit card receipt, or a letter from the organization acknowledging the contribution and its amount and date,” says Stravin. “For non-cash contributions under $250, obtain a receipt from the organization listing its name, location, date of the contribution and description of the property.
“If you’re making contributions of cash or property greater than $250, you’re required to have a written acknowledgement of the contribution from the organization by the time you file your tax return. And for contributions of property greater than $500, also keep documentation of how and when you first obtained the property as well as your basis in the property when you donated it. For property donations greater than $5,000, you must also obtain an appraisal for the property contributed (unless the property is publicly traded stock).”
Don Sadler is an Atlanta-based writer and editor specializing in issues of interest and relevance to small business owners. Reach him at don@media3pub.com.
