Should Business Corporations Be More Charitable?

August 11, 2020

Today’s post briefly explores whether the term “corporate charity” is an oxymoron. It also tries to provide a framework for evaluating whether certain “charitable” activities should be undertaken by a business corporation. It is predicated, in no small part, upon the general premise that one must appeal to the corporation’s self-interest[i] in order to secure various charitable goals.[ii]

The Last Three Years

Historically, Americans have given to charitable causes like no one else. Recent experience demonstrates that they continue to respond to their charitable inclinations.

In fact, charitable giving in the U.S. during the years 2017, 2018 and 2019 achieved the three highest levels of giving ever recorded.[iii] Perhaps this should not come as a surprise when one considers the performance of various leading economic indicators during this period; during the sandwich year of 2018, for example, personal income grew 4.4 percent, gross domestic product grew 4.1 percent, and the S&P 500 grew almost 29 percent.

From 2017 through 2019, lifetime and testamentary charitable giving by individuals increased by 2.3 percent and 9.8 percent, respectively, while charitable giving by corporations increased by 9.5 percent.[iv]

Of the approximately $450 billion given to charitable organizations during 2019,[v] about 69 percent came from individuals – representing 1.9 percent of their disposable income – 10 percent came as testamentary transfers by deceased individuals, and approximately 5 percent came from corporations – representing 1 percent of corporate pre-tax profits.[vi]

Corporate Charity

Some may be inclined to throw a fit over the “discrepancy” in relative giving between individuals and corporations, both in terms of absolute numbers and as a percentage of disposable income.[vii]

Please remember that the for-profit business corporation’s reason for being is to make money for its shareholders – “persons” who are, or who are ultimately owned by, individuals. That’s why the corporation was organized, and that’s why its shareholders have dedicated their knowhow, or have contributed their capital, to the corporation – i.e., they have invested, and put at risk, their time, intellectual capital, and money[viii] – in exchange for shares of stock in the corporation. Why? For the opportunity to realize a worthwhile return on their investment.[ix]

Over time, government and society, generally, have pressured the corporation to increase its commitment to other “constituents,” especially its employees,[x] but also its customers. More recently, the corporation has been taken to task for not demonstrating a greater commitment to its “community” at large.

In general, corporations have responded by adapting old policies to these changing demands, and by adopting some new ones, with varying degrees of “success.” Some corporations have been more public and vocal than others about touting these activities and calling attention to their status as good corporate citizens.[xi] In every case, the corporation’s responses involve an expenditure of monies – in other words, there is an opportunity cost.

At the same time, the corporation’s principal profit-making purpose has not changed, notwithstanding that many would like to see the corporation transformed into an active agent of social change. The best way to reconcile these goals – and indeed the most effective way of attaining long-lasting and desirable consequences – is to demonstrate how such change will ultimately lead to greater profit, assuming that is the case.

In this way, the corporation may be enlisted as a willing partner to effectuating social change.

Without this level of self-interested involvement, the corporation will remain merely a taxpayer from which to collect revenues – be it at a flat 21 percent federal rate or pursuant to some graduated rate structure – or to encourage to make certain expenditures in exchange for tax benefits.

Corporate Giving

Let’s assume a closely held corporation with at least two shareholders; whether it is family-owned or not is not necessarily relevant. How do the corporation’s decision-makers decide upon which charitable organizations to support and from which to withhold support? What factors do they consider?

If the charity happens to be a client, or if the charity is important to the owners of a client or vendor, it may be wise for the corporation, from a business perspective, to maintain that relationship, assuming it makes economic sense, by making a contribution that is commensurate to the importance of the relationship.[xii]

Alternatively, the corporation may decide to support a charity whose mission aligns with the corporation’s products or line of business. Thus, for example, a sneaker and sportswear distributor may contribute funds to a local charity that encourages physical fitness. In this case, the corporation is promoting its business through name or brand recognition.

Expense or Contribution?

Outside of the above-described scenarios, and others similar to them, the decision becomes more difficult to justify from a business perspective when there is more than one shareholder. For instance, I was once involved with a situation in which a minority shareholder was upset that the majority shareholder had used corporate funds – without any ostensible corporate purpose or economic benefit – to support the latter’s favorite charities rather than making larger distributions.[xiii]

Either way, however, the question must be asked: Is the contribution being made in order to secure some economic benefit for the corporation?[xiv] Does the corporation expect to receive a more-than-incidental benefit in exchange for the contribution?[xv] If so, is it really a contribution, or would it be more accurately characterized as an advertising expense, for example?[xvi]

How much of an economic benefit must the corporation reasonably expect in order for the contribution to qualify as a business expense, as opposed to a charitable gift?[xvii] The answer may have tax and, therefore economic, consequences.

The Code allows a taxpayer to claim a deduction for all the ordinary and necessary expenses paid or incurred by the taxpayer in carrying out a trade or business.[xviii]

On the other hand, it has long been the case that, in order for a transfer to be treated as a gift for income tax purposes, it must be motivated by a “detached and disinterested generosity.”[xix] For example, in the case of a bargain (below market) sale of property by a taxpayer to a charity, the taxpayer must demonstrate that they intend to make a gift of the bargain element in order to claim a charitable deduction for the bargain element – the transaction cannot merely be a bad deal for the taxpayer.[xx]

Does the application of such a standard to a business corporation make any sense? As a matter of corporate law, is there a reasonable argument that such a transfer constitutes an act of “ultra vires?”

Assuming the corporation expects to receive some benefit – call it goodwill, name or brand recognition – is the benefit so “incidental,” or is the value of the benefit so difficult to determine, such that the charitable deduction should be saved?

Alternatively, what if the contribution is being made at the request or behest of a particular shareholder (as in the situation described above)? What if the shareholder sits on the charitable recipient’s board of directors? In the absence of some demonstrable business purpose, should the contribution be treated as a distribution to the shareholder – a nondeductible constructive dividend or other distribution?[xxi] Probably not, at least where there is no economic benefit to the shareholder or to some related person.[xxii]

The proper characterization of a corporate transfer to a charity will have some meaningful consequences, as discussed below.

Pre-COVID Tax Incentives

The view that corporations are business organizations operated for profit, and that eleemosynary activities, including charitable giving, are best conducted by private individuals and by not-for-profit organizations, is reflected in the tax incentives for charitable giving that are afforded to individuals versus corporations.[xxiii]

For example, for a taxable year beginning before January 1, 2026, an individual may claim an income tax deduction for a cash contribution made to a domestic public charity[xxiv] up to an amount equal to 60 percent of the individual’s contribution base;[xxv] for cash transfers made after 2025, the percentage limit becomes 50 percent.

A corporation’s total charitable contribution deduction for a taxable year, on the other hand, may not exceed 10 percent of the corporation’s taxable income for such year.[xxvi]

In addition, although the deduction for both individuals and corporations is contingent upon the recipient entity being organized in the U.S., a corporation’s contribution to a charitable trust or to a private foundation will be deductible only if it is to be used within the U.S. or any of its possessions.[xxvii] A similar gift by an individual to a trust or foundation is not limited in this way.[xxviii]

A corporation may be tempted to claim a business expense deduction for that portion of its contribution to a charity that exceeds the above-described limits. Unfortunately for the corporation, Congress foresaw this possibility; thus, the Code provides that no such deduction will be allowed for any contribution which would be allowable as a charitable deduction if not for the percentage limitations.[xxix]

In other words, the corporation must determine whether the transfer will be treated an expense or as a gift.

Pandemic and CARES Act[xxx]

The economic shutdown that followed the president’s declaration of a national emergency in March of this year resulted in a sharp decline in almost every measure of economic activity, with the exception of unemployment, which skyrocketed.[xxxi]

In response to the economic disruption caused by the pandemic, the CARES Act[xxxii] amended the income-based percentage limitations for charitable contributions, effective for taxable years ending after December 31, 2019, with the goal of maximizing the influx of immediately available funds to charitable organizations that are directly engaged in activities for the benefit of the general public.[xxxiii]

The Act suspends the TCJA’s 60 percent limitation, and in its stead provides that an individual who itemizes deductions and makes a cash payment as a charitable contribution to a public charity during the calendar year 2020, may elect to claim a deduction in respect of such contribution of an amount up to 100 percent of the taxpayer’s 2020 contribution base.

In the case of a corporation, such a cash contribution to a public charity during 2020 will be allowed as a deduction in an amount up to 25 percent of the corporation’s taxable income (rather than the otherwise applicable 10 percent).

Any amounts in excess of the taxpayer’s applicable contribution base may be carried forward by the taxpayer for up to five years.[xxxiv]

Again, it appears that Congress believes charitable giving is best handled at the individual level.


Corporate charitable giving as a percentage of corporate pre-tax profits fell off during and immediately after the Great Recession. The reaction to the pandemic was very different, at least initially – by all accounts, businesses were quick to react to assist charities; of course, they were responding to a genuine national emergency, rather than to a “self-inflicted” financial crisis. That being said, it is still too early to tell how charitable giving will be impacted as we continue to deal with the pandemic and its economic consequences, including the financial strains under which most businesses are now operating.

It is noteworthy that the tax environment following the Great Recession was quite different than it is today. The current flat federal corporate tax rate of 21 percent leaves a business with more options than does the prior maximum graduated rate of 35 percent,[xxxv] though even that distinction may prove to be inconsequential if profits suffer enough.

In any case, long-term tax and corporate policies toward charitable contributions should not be made in the midst of, or on the basis of data gathered during, an emergency.

That said, the factors described above should help a closely held corporation with implementing a plan for charitable gift-giving. In short, charitable contributions should be used strategically; the corporation should be able to demonstrate some economic benefit or motivation for its “gifts.”

The corporation’s financial accounts should never be used as personal check-writing accounts for the shareholders, even if the funds are being given to charity – this is just sound business practice. In this way, disputes among shareholders over the use of corporate funds can be avoided. Likewise, third parties would be harder-pressed to point to such giving as evidence of the corporation’s status as the alter ego of its shareholders.

I think that the position set forth in the federal gift tax regulations is helpful in this regard, and the guidance implicit therein should be relatively simple to implement: corporations don’t make gifts, their shareholders do.

[i] I am not trying to humanize the corporation; rather, I am merely recognizing that it represents a collection of individual decision-makers and equity owners who have come together for profit. See Reg. Sec. 301.7701-1.

Nor am I ignoring the fact that there are businesses that, under the right facts and circumstances, will act without regard to their bottom line. These folks are exceptional. By definition, there aren’t enough of them to make a societal or systemic difference.

[ii] Many charities already do this as part of their solicitation of businesses.

[iii] On June 23, 2020, Nonprofit Quarterly published the results of a study that was presented on June 18, 2020 by Dr. Patrick Rooney of the Indiana University Lilly Family School of Philanthropy at IUPUI and Laura MacDonald, the vice chair of Giving USA. I recommend this very informative and comprehensive report to anyone who works in charitable giving. https://nonprofitquarterly.org/giving-usa-2020-what-are-the-implications-for-you/?gclid=EAIaIQobChMIxsyhhaKM6wIVEQiRCh159w-KEAAYAyAAEgJxMPD_BwE

The data cited in today’s post may be found in this study. To the extent any conclusions presented herein differ from those of the study or of its authors, well, that falls on me.

[iv] Foundation grants increased by 7 percent.

[v] Of this $450 billion, 29 percent went to religious organizations, 14 percent to educational institutions, 12 percent to human services organizations, 12 percent to grant-making foundations, and 9 percent to health organizations. The balance went to a variety of charitable entities, including arts, cultural, environmental, and other organizations.

[vi] According to a study conducted a while back, small businesses donate an average of 6 percent of their profits. This may be attributable to their greater reliance upon the patronage, support and goodwill of the local community in which they operate; this, in turn, incentivizes these businesses to be visibly more supportive of local charities. https://www.businessnewsdaily.com/10470-small-business-guide-charity-donations.html

[vii] To use a corporate term, let’s call it unappropriated retained earnings. In other words, the pot from which corporate dividends would otherwise be payable to shareholders.

[viii] The opportunity costs are real.

[ix] In his 2020 annual letter to shareholders, accompanying JP Morgan’s 2019 Annual Report, Jamie Dimon told shareholders that COVID-19 was going to be a major factor in 2020’s performance. After describing the “extraordinary lengths” to which JP Morgan will go to help its customers, its employees and its communities – presented in that order – the letter then assures its shareholders that dividends will not be suspended (except in the most dire of circumstances). https://reports.jpmorganchase.com/investor-relations/2019/ar-ceo-letters.htm. (He also explained that the bank was halting buybacks of its stock.)

[x] The incentive here is obvious: align the economic interests of one’s employees with those of the business, and both should benefit.

In addition, in order to attract and retain good employees, the corporation has to offer certain basic benefits, be it competitive wages, health insurance, life insurance, 401(k) plans, year-end bonuses, flexible hours, etc.

Others support their employees’ charitable activities by taking sponsorships or by matching charitable gifts.

Some offer scholarships for the children of employees.

[xi] I am reminded of the parable of the Pharisee and the tax collector. The latter is the hero of the lesson, but let’s focus on the Pharisee. He entered the Temple, walked to the front, and prayed aloud to G-d, reminding Him (as if it were necessary), among other things, of how much of his profit he gave to the poor. Luke 18:9-14.

See also the order of the topics discussed in Mr. Dimon’s letter, above.

[xii] Why do you think so many charities seek out gala honorees on the basis of their ability or potential for raising money? Even where the honoree has no previous connection to the charity. If you’ve served on enough boards long enough, you’ve seen this many times for yourself.

[xiii] I have to say that the minority shareholder was equally upset about not having been afforded the same opportunity.

[xiv] It would behoove a corporation’s officers to review the applicable state law for any restriction on the ability of the corporation to make certain charitable contributions.

New York’s Business Corporation Law specifically provides that a corporation “shall have power in furtherance of its corporate purposes: . . . [t]o make donations, irrespective of corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes, and in time of war or other national emergency in aid thereof.” BCL Sec. 202(a)(12). “In furtherance of its corporate purposes” – how direct a connection is required?

[xv] This issue has occupied charities for years in distinguishing a gift from advertising income or other unrelated business income. The array of political forces at work here have been extraordinary. In many cases, it has taken some intellectual contortionism to generate the “desired” result.

[xvi] And deductible as an ordinary and necessary expense of conducting the business. IRC Sec. 162.

[xvii] Speaking of “gifts,” it should be noted that Reg. Sec. 25.2511-1(h)(1) explains that a corporation cannot make gifts for purposes of the federal gift tax; rather, the corporate transfer is treated as a gift by its shareholders.

[xviii] IRC Sec. 162(a). It is assumed that the amount paid or incurred is reasonable in light of the consideration received in exchange – why would someone overpay?

[xix] Comm’r v. Duberstein, 363 U.S. 278 (1960).

[xx] Compare the gift tax. Reg. Sec. 25.2511-1(g)(1) states that donative intent is not an essential element in the application of the gust tax to a transfer. The tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.

However, the regulation also states that the gift tax is not applicable to ordinary business transactions. Thus, Reg. Sec. 25.2512-8 provides that a transfer of property made in the ordinary course of business (bona fide, at arm’s length, free from donative intent) will be considered as made for full and adequate consideration in money or money’s worth.

[xxi] IRC Sec. 301 and Sec. 1368.

[xxii] Rev. Rul. 79-9.

Compare that to the situation of a corporation that satisfies a shareholder’s charitable pledge.

[xxiii] This refers to C-corporations. Charitable contributions by S corporations are separately stated on the Schedule K-1 issued to each shareholder because the separate treatment of such item could affect the liability for tax of that shareholder; for example, the addition of the shareholder’s distributive share of a corporate contribution may impact the shareholder’s ability to deduct currently a contribution made individually by such shareholder/. IRC Sec. 1366(a)(1)(A); the S corporation is not allowed a deduction for charitable contributions. Sec. 1363(b)(2). Similar rules apply to partnerships and their partners. IRC Sec. 702(a)(4); the partnership is not allowed a charitable deduction. IRC Sec. 703(a)(2)(C).

[xxiv] IRC Sec. 170(c) and Sec. 509(a). No income tax deduction is allowed for a transfer to a foreign charity. Interestingly, the gift tax and the estate tax generally allow deductions for transfers to foreign charities.

[xxv] IRC Sec. 170(b)(1)(G). One’s contribution base for a taxable year is means the individual’s adjusted gross income (IRC Sec. 62) for that year, but without regard to any NOL carryback to that year. IRC Sec. 170(b)(1)(H). The TCJA temporarily increased the limit from 50 percent to 60 percent. The cap reverts to 50 percent after 2025. Sec. 170(b)(1)(A).

[xxvi] IRC Sec. 170(b)(2)(A). The corporation’s taxable income is determined without regard to NOL carrybacks and other enumerated items. IRC Sec. 170(b)(2)(D).

The “excess” contribution may be carried forward to the five succeeding taxable years. IRC Sec. 170(d)(2).

[xxvii] IRC Sec. 170(c)(2).

[xxviii] That is not to say that there are no other requirements that must be satisfied before a deduction is allowed.

The use of funds contributed to a charitable corporation is not restricted in this way.

[xxix] IRC Sec. 162(b); Reg. Sec. 1.162-15.

[xxx] Here again, many businesses acted to help their communities – not all, though. Many were in survival mode.

[xxxi] Don’t talk to me about the stock market. Even the oracle at Delphi would have been hard-pressed to foresee its movements.

[xxxii] P.L. 116-136 (the “Act”).

[xxxiii] Consistent with the above-stated intent, contributions to a private foundation, to a supporting organization, or to a public charity for the establishment of a new (or for the maintenance of an existing) donor-advised fund, will not qualify for the enhanced deduction under the Act because such funds will not necessarily be immediately employed in charitable activities. For example, there are no minimum distribution requirements for a donor-advised fund; a private foundation can get away with distributing only 5 percent of the aggregate fair market value of its assets; supporting organizations may perform a number of functions on behalf of a public charity, not all of which result in immediate liquidity for use by the supported charity.

[xxxiv] https://www.taxlawforchb.com/2020/04/give-and-it-shall-be-given-unto-you-charitable-giving-after-the-cares-act/#_edn32

[xxxv] P.L. 115-97. The Tax Cuts and Jobs Act (“TCJA”) provided for a flat 21 percent federal corporate income tax rate.