By Jean Kruse / Guest Editorial
As a mentor and counselor with SCORE, it has been a surprise to me that so many of our young clients want to immediately donate to a charity, right from the beginning of their business. Then I read Chase Castle’s article, “Generation Shift,” in the March 2 edition of the Corridor Business Journal, and may have discovered why that is: millennials “have expressed strong levels of interest in companies that contribute to shared social or charitable interests.”
The concern I have had with these SCORE clients is that they state, for example, that they want to give 10 percent of their sales to a particular charity. I must remind them that the bottom-line profit of many (even profitable) companies does not reach as high as 10 percent of sales.
I worked with one young entrepreneur who had been writing a check to her church for 10 percent of each sale she made, and her profit was nowhere near 10 percent of her sales. I explained to her that, in my view, giving 10 percent of her profit, rather than 10 percent of her sales, would satisfy her promise of tithing.
Managed giving doesn’t just mean writing a check to a charity – it can take many forms:
- Helping those less fortunate can be part of your business mission, which can include donating a percentage of the profit to named charities.
- Allowing employees to help choose charities to fund if the business has a profitable year or meets certain goals.
- Allowing employees to donate a certain amount of their time for which they are paid to a charity of their choice. This will come back to your business as goodwill in the area.
- Giving away products that your business manufactures or services that your business provides
What many new entrepreneurs probably do not realize is that for most types of entities, a donation to charity does not reduce the profit of the business for income tax or self-employment tax purposes.
Charitable donations by sole proprietors, partnerships and S Corporations must be deducted on Schedule A, Itemized Deductions, of the sole proprietor, partner and S Corporation shareholder, not on the entity’s tax form. A C Corporation can deduct charitable donations on the entity’s tax return, but there is a limit as to how much can be deducted. Not everyone gets value from itemizing deductions – businesses should discuss this with their tax preparers so they fully understand if donations will reduce their income tax. Charitable donations never reduce self-employment tax.
Another factor to consider is whether or not the charity is a qualified charitable organization in the eyes of the IRS. To verify that the charity is approved by the IRS, go to http://bit.ly/exemptorgs, where you can request info about a particular charity or get a list of all approved charities.
Philanthropically minded individuals may not worry about whether or not they can reduce their income tax by making donations to charities – they simply want to give back to their community. That is an admirable trait. Most entrepreneurs probably also realize that the public relations benefits generated by their business’ efforts to give back to the community is more valuable than a tax deduction – these gestures are valuable advertising for your business, and improve the admiration of your employees.
Toby Dayton, president and CEO of JobDig and LinkUp in Minneapolis, reminds us that, “at the end of the year, our employees will most likely not remember the day they approved the budget or reworked some element of your operational workflow. But I assure you they will remember the day they poured concrete and laid the floor of a garage in a house for a low-income family… The question is not, ‘can you afford to donate your time?’ The real question is ‘how can you afford not to?’”
Managed giving is not just for huge corporations, or businesses that make big profits. It does make sense, however, to first get your business in a profitable phase, as many businesses have losses in their first year or more. Then ask your accountant or tax preparer and your attorney about the best ways to begin giving back to your community.
If you need a mentor with whom you can discuss startup topics, business ideas or just someone who will listen and help sort out your thoughts, sign up for a face-to-face meeting with a SCORE mentor on our website, www.scorecr.org. You can meet with your mentor as often as you like and the discussions are free and confidential.
Jean Kruse is a SCORE counselor and SCORE Iowa district president. She operated her own CPA firm for 13 years and in 1988, joined RSM McGladrey, a national firm, where she provided accounting and tax services to small businesses.
