Benefit companies now enjoy a new tax advantage over traditional corporate entity types. In October 2016, the IRS announced that benefit companies’ advertising expenses are deductible as a business expense, even when the payment is made to a nonprofit organization.[1]
In 31 states, businesses have the option to incorporate a business as a “benefit company.” The designation allows owners and corporate boards to make decisions based on more than just profitability, but requires additional reporting requirements.
As a result of the new IRS position, benefit companies now could enjoy a tax advantage over traditional legal entities. Under Section 162 of the Code, benefit corporations can deduct 100% of their gifts or payments to charity as an ordinary and necessary business expense, even if they are made to nonprofits, provided those gifts or payments are 1) made with a reasonable expectation of financial return, and 2) bear a direct relationship to the benefit company’s trade or business.
The “promotional payments” deductible could encourage benefit companies to contribute to nonprofits because of the advantage over simply making a charitable gift. Under Section 170 of the Code, corporate charitable gifts, made without receiving anything in exchange, are generally limited to ten percent of the corporation’s taxable income. Individuals’ charitable contribution deductions are generally limited to 50 percent of the taxpayer’s contribution base. For benefit companies taxed as corporations or partnerships, the 100 percent deduction for payments made to nonprofit organizations as a business expense clearly presents an exciting opportunity.
To differentiate a charitable gift from a promotional payment, a benefit company needs to consider its return on investment. For example, benefit companies need to document promotional payments in writing, such as in corporate minutes or correspondence to the recipient. Also, benefit companies need to make sure the expected return is commensurate with the amount paid. For example, just as with any business expenditure, a $100,000 expense likely does not justify the sale of $100 in goods or services.
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* This material is for your general educational information and is not intended as legal advice. Readers are responsible for obtaining legal advice applicable to their specific situations from their own legal counsel.
[1] General Information Letter 2016-0063