More and more, businesses are announcing that they will give a certain percentage of sales or other proceeds to nonprofits and social enterprises The IRS has recently released Chief Counsel Advice that addresses this type of business donation, which sometimes is called a charitable sales promotion. While the advice does not provide definitive answers, as it acknowledges that the facts at issue were still being developed, it gives a solid glimpse into the IRS’ thinking on the issue.
The advice first provides guidance on who is considered to make the donations or payments that go to the nonprofits and other entities. Again, while the guidance isn’t definitive, the IRS does indicate that it appears from the facts at hand that the payments are being made by the businesses themselves, and not by the customers. This is key, because there can often be confusion as to whether customers are eligible for any deduction for the amount they pay.
The advice then goes into whether the payments constitute deductible business expenses when paid to the charitable entities. While a business expense deduction is generally not allowed for charitable contributions, a transfer to a charity will qualify as a deductible business expense if it is directly related to the taxpayer’s business and is made with a “reasonable expectation of financial return commensurate with” the amount transferred. Here, the IRS indicates that the taxpayer business appears to have acted with the reasonable belief that, in establishing the sales contribution program, it would enhance and increase its business. This also is an important issue, because there are some limitations around charitable deductions that aren’t in place for business deductions, yet uncertainty has persisted as to whether these types of programs have the necessary amount of marketing/business motivation to qualify. The IRS appears to be saying they do.
Finally, the advice weighs in on the contributions that go to social enterprises or other organizations that are not charitable entities. Here, the analysis is generally the same as to the taxpayer business’ reasonable expectation of financial return. However, the IRS does discuss the limitation on deductibility that exists for any amount paid for lobbying or political activity. The advice concludes that it is unlikely that any of the donations could be considered lobbying activities under the regulations.