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Lead Your Team Strategy

Small Business Guide to Charitable Giving

SMB Guide to Charitable Giving
Credit: Rawpixel.com/Shutterstock

With the holiday season in full swing, many businesses celebrate and bring in the new year with a gift to charity. It's a simple act of kindness that benefits the community and helps build brand goodwill. For small businesses, donating to charity can also bring with it a handful of difficulties and potential headaches.

If your business wants to give to charity this holiday season, or at all during the year, it's crucial to follow a few guidelines.

Let's start with the basics. There are a few reasons why your business should consider donating. Charitable giving is good PR, and it makes sense for your business, especially small businesses that are dependent on their community to keep them in business.

"What distinguishes small business from large-scale corporations is the connection with the community," said Kristen Fusaro-Pizzo, owner of Bath, Body, Candle Moments. "People want to … shop at a small business because a small business cares about them, as individuals, and the causes they care about."

Charitable giving demonstrates that you give back to the community and that you're in business for more than making a profit. As a small business, while you don't get as large a tax deduction that large corporations and enterprises do, don't overlook the other benefits you glean from philanthropy.

"As a single-store retailer, it is important for us to give back to the community," said Brad Schweig, vice president of operations for Sunnyland Furniture. "There isn't really any tax benefit for us, so it comes back to being a part of our community. We do think it helps us from a marketing standpoint as we want people to know that we are local, our team is local, and we support making our local community a better place."

Charitable giving is also a way to build alliances with other organizations and network with individuals who could become potential partners. Donating to a local organization can mark the start of a long-lasting relationship.

"Develop an ongoing relationship with the charities you support," said Kris Putnam-Walkerly, president of Putnam Consulting Group, a philanthropic advisory firm. "Don't limit giving to the end of the year. Talk to the nonprofit about ways you could help year-round, such as volunteering, sponsoring events, and inviting the charity's CEO to speak to your local business associations. And, remember, this is a two-way relationship. Ask the charity if there are easy ways they could publicize your support, such as in their donor newsletters."

To make the most out of your donations, first, pick the right organization to donate to. For a small business that's tied to the community, it often makes sense to pick a local group.

"We try to focus on smaller local groups versus nationwide organizations, since these are the ones that the bigger companies seem to miss," Schweig said.

For your donation to qualify for a tax deduction, your chosen charity needs to be a bona fide 501(c) (3) organization. Use the IRS' search tool to confirm the group is registered. You can search by state, which helps you quickly find your charity of choice to confirm whether you are eligible to receive a tax deduction. It's important to note that the Tax Cuts and Job Act of 2017 made it harder to claim tax deductions for charitable giving.

There are ways, however, to get around this change, including the use of a donor-advised fund. A donor-advised fund allows you to donate enough money upfront in one year to become eligible for tax deductions while the donor-advised fund holds onto the money. You can then distribute the money from the fund over several years if you want to make more regular donations. 

Sound complicated? It can be if you're unfamiliar with the regulations. It's not a bad idea to speak with financial experts for advice on how to donate to charity in a way that makes sense for your business.

"As far as looking for advice somewhere, I honestly believe [small business owners] should be talking to their tax advisor," said Kathleen Adams, partner at Signature Estate & Investment Advisors LLC. "It's too complicated right now. People have a lot of misconceptions."

"They come to me all the time with things they've read on the internet," said Adams. "This isn't the year to do that."

Another concern of business owners is whether their money ends up in the right place. If you're going to donate money, you want to make sure it's put to good use.

"Do your homework," said Putnam-Walkerly. "Just because an organization is well known doesn't mean it's well run. There are many websites that provide a tremendous amount of information about nonprofits, such as Guidestar, Charity Navigator and the Better Business Bureau Wise Giving Alliance.  You can also pick up the phone, call the organization, and ask to speak to the executive director. Nonprofit leaders should be happy to talk with potential donors about their organization and their impact and should be especially interested in building relationships with local businesses."

Fusaro-Pizzo suggests picking an organization that's aligned with your brand. For example, a company that has beach branding should get involved with organizations that advocate for clean water or ocean life.

It's also important to keep your chosen charity informed about your plans. Most organizations have a business outreach individual you can contact and coordinate with for your donation and any resulting PR. Even though they're a nonprofit, you still need their permission if you want to use their branding in any press releases or announcements you make to customers.

According to the U.S. Small Business Association, companies donate an average of 6 percent of their profits to charity. The tax benefit you'll receive will be based on how much you give and your business's revenue. You can find the detailed tax benefit rules in the IRS tax code. Again, the Tax Cuts and Jobs Act made some of these tax laws somewhat more complicated than previous years. With tax laws always subject to legislative change, it can be difficult to stay on top of the latest adjustments. That's where bringing in a trusted tax advisor can help.

In terms of selecting exactly how much you will give to charity, it's important to consider a variety of factors. Donating to local organizations is a worthwhile cause, and it's also important to look out for the interests of your business. Don't donate an amount that will sink your business. Be smart and charitable.

"If you are going to donate $1,000, and let's say you get a $330 tax savings, you're still giving the other $670 away," Adams said. "Business and personal cash flow, in my mind, has to be first. They can't compromise even though they may want to give to charity."

Adams stressed the importance of both giving to charity and looking at your personal and business cash flows. In this same light, it's best to keep detailed records of charitable donations for your tax return. Most nonprofits will give you a standard form for tax-filing purposes.

Your business isn't limited to just giving money. Volunteer work offers many of the same benefits as a generous monetary gift, and it sends a strong, positive statement to customers and the community in which your business is based. This is a tremendous option for businesses trying to save money, Adams said.

However, you can only write off certain expenses, like materials and not actual labor. You can't write off your employees' time volunteering at the animal shelter, but you can write off items like mileage.

While your business might have other people's needs at heart, online scammers try to take advantage of people's generosity during the holiday season.

Adrien Gendre, North American CEO at Vade Secure, believes businesses or individuals that donate to charity via gift card are at risk of being scammed. Gendre says a scam where people or businesses are asked to purchase gift cards from nearby stores and provide those posing as charities with the codes is a scam that's on the rise. He says to avoid donations like this where almost nothing can be tracked.

Additionally, Gendre says to look out for well-designed email and website scams. If you receive an email from what appears to be a legitimate source, double-check the person's email address and accompanying website to ensure you're not being duped by someone mirroring the design of an actual company's website with a minor change to the web address.

"Go on Google, type the brand, find the website from Google and compare the URL," Gendre said when describing how to verify a website's legitimacy. "That's the easiest trick."

By going on Google and searching the website, you can compare the two websites and URLs side by side. This allows you to determine if the email sent to you is fake.

It's also important to understand the complexity and thoughtfulness of some scammers. When it comes to email cons, studies suggest that scammers select days of the week to send phishing emails based on when people's inboxes are busiest. Don't fall into a trap because you're hurried on a busy day during the holiday season.

According to Gendre, the No. 1 red flag of a scam is someone trying to rush you into donating. There's never a reason why you or your business would need to quickly donate. If someone tries to pressure you to donating over email or the phone, it's a good idea to take a step back and question the legitimacy of the donation.

There are few downsides to charitable giving. It's not as simple as dropping loose change into the donation bucket. Making a large donation requires research and planning. It's important to avoid scams. Make sure you and your nonprofit partners are both versed in the federal tax code as well as your state's specific tax rules; otherwise, you may not be able take those tax deductions, and you could face increased scrutiny from the IRS.

On the other hand, giving to charity is a great way to help the community and make your business a more engaged participant in that community. There are dozens of reasons to donate to charity. If your business decides to give, make sure it takes proper precautions and steps to stay within legal guidelines.

Additional reporting by Andreas Rivera. Some source interviews were conducted for a previous version of this article.

Bennett Conlin

Bennett is an editorial assistant based in New York City. He graduated from James Madison University in 2018 with a degree in business management. During his time in Harrisonburg he worked extensively with The Breeze, JMU’s student-run newspaper. Bennett also worked at the Shenandoah Valley SBDC, where he helped small businesses with a variety of needs ranging from social media marketing to business plan writing. Contact him through email or Twitter.