The Benefits of Charitable Giving for Small Businesses

As a small business owner, you can't compete with the dollars big corporations donate to charity or get the same tax breaks. But by incorporating charitable giving into your business, you can still make a positive impact on your business as well as your community.

Why A Small Business Should Donate to Charity

Many small business owners think only of the money they're spending and the tax write-off they're getting when they tally up the pluses and minuses of donating to charity. But giving back can also give your business unexpected returns.

In addition to the tax benefits (discussed later in this article), a charitable giving program can help small businesses gain brand recognition, improve employee retention, and get more sales.

Here are some of the ways donating to charity can make a difference in your business:

Attract more customers. The size and stature of a company are no longer the only things consumers consider when they make buying decisions. They want to do business with companies that share their values. A charitable giving program shows you care about your community. It raises awareness and draws customers to your business.

Aid in promoting job satisfaction and retaining employees. Employers and employees don't often view the workplace in the same way: Bottom-line improvements might energize a small business owner, while workers are more likely to focus on things like getting recognition for a job well done. But a common cause between the two groups closes some of that gap. A charitable giving program that brings social purpose to a job function can help you motivate workers and improve job satisfaction—an important factor in employee retention.

Enhance your brand. Supporting charitable causes gives your business an identity; it also builds brand awareness and sets you apart from the competition. When you sponsor charitable programs, customers can tie your brand to a mission, spurring conversation around your company.

Expand your professional network. By supporting charitable organizations, you'll get an opportunity to network with professionals you might never meet otherwise. You'll also get the opportunity to rub elbows with prominent community and business leaders who often sit on the boards of nonprofits.

Ways to Incorporate Charitable Giving into Your Small Business

Think about your charitable giving program as part and parcel of your business model and find ways to integrate the charity into your day-to-day business.

Your donations don't have to be monetary. You can donate products, services, or time such as:

• organizing a volunteer day and giving employees paid time off to participate
• donating equipment, property, or supplies such as laptops, vehicles, and printer paper, and
• lending expertise such as accounting or graphic design services to a nonprofit.

When you make monetary donations, consider ways to incorporate customer incentives into your giving programs. For instance:

• Retailers can donate a portion of each sale.
• An interior design business can donate a set amount, like $25, each time a customer asks for a consultation.
• A real estate broker might use a charity donation to incentivize customers to ask for a home valuation.
• An insurance broker might tie in charitable donations to requests for estimates.
• A gym owner might donate when customers sign up for a trial workout session.

A small business can also make socially responsible improvements to its operations to attract and engage customers.

For example, a manufacturing company might reduce the product packaging it uses to promote sustainability, or it could source products from minority-owned businesses to promote social and economic equity.

Choosing a Nonprofit for Your Small Business Donations

The best charitable giving programs are personal. They reflect causes you, as the business owner, are genuinely interested in. Choosing a cause that has a meaningful connection to your business will help attract customers and strengthen your branding efforts.

These are some examples of ways to align your small business with a charitable cause:

• A hair salon can provide free haircuts at homeless shelters.
• A restaurant can donate food to a food pantry.
• A gym can provide fitness classes at a senior living facility or sponsor a local sports team.
• A tech company can teach computer literacy classes at programs for at-risk youth.
• A children's clothing store can donate money to a children's hospital.

You can also engage your employees in selecting a charity. Their ideas are likely to reflect the community you serve so their interests can help you identify causes your customers care about.

Once you've decided which charitable cause you want to connect with, you'll need to select a charity that aligns with that cause. For instance, if your cause is wildlife preservation, then you need to sort through the various animal charities to find one to support.

Here are some ways to screen a charity.

Verify that the charity you select is tax-exempt. The Internal Revenue Service (IRS) allows you to claim a tax deduction only for donations to bona fide, tax-exempt charity organizations. Charities qualified for tax-exempt status are categorized as 501(c)(3) organizations and listed with the IRS. Use the IRS tax-exempt organization search tool on the agency's website to verify the charity's tax-exempt status.

Research the charity's mission and financial condition. The charity's website should clearly state its mission, services, and the audience it serves. Make sure the charity has the financial wherewithal to accomplish its goals. Check to see how much of its funding goes to the actual services it provides rather than to administrative expenses. Websites like GuideStar, Charity Navigator, and Charity Watch provide financial statements (tax-exempt organizations file IRS Form 990), and other valuable information about the charity's operations.

Meet with the charity's leadership team. Especially if you plan to develop an ongoing relationship with a charity, it's a good idea to meet with its management to assess its commitment, capabilities, and fit with your business.

Check the internet for negative press about the charity. By thoroughly vetting any charities you donate to, you'll ensure the charity is legitimate and avoid scams and scandals that can taint your business's reputation.

What Types of Charitable Donations Are Tax Deductible?

As a general rule, you can deduct cash donations and donations of property or equipment to 501(c)(3) organizations on your federal tax return. You can also deduct travel expenses related to work you do with a charity.

However, the value of the time you or your employees spend doing volunteer work isn't tax deductible. Neither is paid time off you give employees to do volunteer work.

Limits and conditions apply to all types of donations. So you should consult the IRS website or a tax professional when taking charitable tax deductions. Keep in mind that the federal deduction you're allowed might be reduced if you receive a state or local tax credit for it.

Deducting Cash Donations

How you deduct cash donations will depend partly on your business structure.

Pass-through businesses: Pass-through entities like sole proprietorships, partnerships, and limited liability companies (LLCs) are allowed certain deductions on their personal income tax. Because owners of pass-through entities pay individual taxes on their share of the business's income, any deduction will reduce their personal income tax, not their business taxes.

Pass-through businesses that itemize deductions can generally deduct cash contributions up to 60% of their adjusted gross income. You'll report these contributions on Schedule A of your personal federal tax return. Some deductions are subject to limits of 20%, 30%, or 50%.

While charitable contributions are generally noted in a pass-through entity owner's personal return, this is not always the case. Sole proprietorships and other pass-through businesses can deduct charitable contributions on Schedule C of their business tax return when the contribution yields a business benefit. For example, a sole proprietor who owns a sporting goods store might get a revenue boost from sponsoring a local children's baseball team because the sponsorship is likely to attract more shoppers to the store.

Corporations: A corporation can deduct contributions of cash, property, or investments —usually up to 10% of its taxable income —as a business expense.

To claim a tax deduction for cash donations, you'll need receipts detailing the amount and date of the contribution.

Deducting Property and Equipment

Property and equipment include items like automobiles, real estate, and intellectual property.

To take a tax deduction for property or equipment you donate, you'll need to establish a dollar value for your contribution. In general, you can deduct the lesser of either:

• the fair market value of the property at the time you made the contribution, or
• the gross proceeds of the sale of the property by the nonprofit you donated it to.

You'll need accurate records for any business asset donations you claim, including documentation of their original value and other costs associated with their purchase. Consult the IRS website or a tax professional for detailed information on valuing property and taking a tax deduction for your non-cash donation.

For non-cash contributions of $250 or more, you'll need a letter from the charity recognizing the donation.

You must file IRS Form 8283 for property contributions of more than $500. For vehicle donations that are more than $500, you must attach the IRS Form 1098-C you received from the organization. You must provide both an acknowledgment and Form 8283 for contributions with a value of more than $5,000.

It's not necessary to file IRS Form 1099 for charitable contributions.

Deducting Travel Expenses

While you can't deduct the value of your time volunteering, you can deduct the cost of travel required for charitable work. Standard IRS mileage rates for the year in which you're filing apply.

Best Practices for Incorporating Charitable Giving

Instead of writing a check at year-end, structure a program that keeps your efforts front and center throughout the year. A continuing effort will keep you on customers' radars and keep employees motivated.

When you make monetary donations, consider framing your donation as a percentage of sales rather than the dollar amount. Studies show consumers regard donations that represent a portion of sales as more valuable than the actual dollar amount you give.

Here are some of the ways you can show your ongoing commitment to giving back.

Let people know what you're doing. Tell your charitable giving story on social media, your website, and your newsletter. Report news of the charities you work with and the results they're achieving. Remember to ask permission from the charity if you want to use its logo or other branding materials.

Keep your charities in the loop. Stay in touch with your chosen charities and keep them updated on your efforts and your plans. Consider inviting the charity to business events you hold. They'll welcome the opportunity to network with your clients and employees and meet new potential donors, and you'll foster long-term relationships.

Get employees involved. Ask employees about the charities they'd like to support. Organize a volunteer day and give employees time off to donate their time to a charity organization.

Give What You Can

The impact you make with your charitable giving program doesn't depend on the amount of your donation. To get the best results, be thoughtful about the charity you choose and keep your efforts consistent.