New Tax Benefit for Benefit Companies

benefit company tax benefit

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.

Contact us to learn more about benefit corporations, taxation, business law, and more.

* 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

Catalyst Law Blog

Knowledge is power. Information is liberating. Education is the premise of progress, in every society, in every family.

Kofi Annan

The articles in this blog are intended to help educate you on some common issues people in Oregon face during divorces, custody disputes, and other family law matters.

The information provided is general and is not intended to be legal advice for any specific case. Reading these articles is not a substitute for consulting with a family law attorney.

Need help?

Contact us today

Latest Articles

Client Highlight: Interview with Janine Firpo, Board Member of Zebras Unite
April 28, 2021
Protect Your Tax-Exempt Status and Avoid Personal Liability: A Guide for Boards of Directors Considering Compensation of Nonprofit Executives and Other Insiders
February 18, 2021
8 Tips to Maximize Your Charitable Contributions This Giving Tuesday
December 1, 2020
Business Divorce and Fiduciary Duties
June 1, 2020
Contracts and Agreements
April 4, 2020