A charitable organization is having a fundraising event and your business wants to support it. As has typically been the case, the business buys two tickets to the event for $100 each, attend the event and have a great time. Prior to the recent tax reform, the business would typically expense the $200 tickets as meals and entertainment and the expense would be 50% deductible or would call the tickets charitable contributions and get the deduction for the charitable contribution and should have reduced the amount of the contribution by the value of any goods or services received.
What would happen if the business thinks a lot of the charity and wants to sponsor the event? So instead of buying tickets, they sponsor the event for $1,000. In this case, if the business is listed on all tickets and the logo is included in printed material, the sponsorship is likely considered advertising (with an amount that should be allocated to meals). However, if the $1,000 gets the business listed as a ‘Platinum Donor’ on the printed material and no other advertising was done, the IRS could consider this a charitable contribution and not advertising.
If the business is a C corporation, the contributions are limited to 10% of taxable income, but advertising has no limitation. Therefore, if the C corporation has no income, they do not get to deduct charitable contributions in the current tax year but would get to deduct advertising.
If the business is a self-employed business or pass through entity, the income and deductions are picked up on the individual owner’s form 1040. Starting in 2018, the Tax Cuts and Jobs Act doubled the amount of standard deductions to $12,000 for individuals and $24,000 for married couples. With this increase, taxpayers are less likely to itemize and take deductions for charitable contributions starting in 2018 until the tax cuts expire in 2025. Also, if the business is a self-employed business, the taxpayer would also save on FICA taxes (social security and Medicare) by the sponsorship being considered advertising.
So, with all this said, does it matter if the sponsorship is considered advertising or charitable contribution? The answer is likely YES. A taxpayer will likely receive more tax benefit for advertising dollars than charitable contribution dollars.
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