You didn't decide to become a social entrepreneur for personal gain.
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But doing the right thing does have certain advantages – not the least of which are the significant tax benefits available to companies who work to fulfill a social mission.
As a social entrepreneur, your organization's legal structure will dramatically impact your ability to access tax benefits. Unless your organization has been granted nonprofit status, you will obviously have to pay taxes on earnings. However, for-profit companies can leverage socially-minded activities to reduce their tax liability – if they understand the tax code and employ a coordinated strategy. Here's what you need to know . . .
Suppose your company manufactures sneakers and is committed to helping needy kids in the local community. With the new school year just around the corner, you decide to open your doors and distribute free sneakers to 1,000 worthy elementary students. At tax time, you can deduct the cost of the sneakers as a charitable deduction, right?
Probably not. The I.R.S. limits charitable deductions of cash and property to qualified charitable organizations. Qualified organizations (e.g. educational institutions, publicly-funded nonprofits, etc.) have received a 501(c)(3) designation from the federal government that ensures their legitimacy and requires them to operate in accordance with rules governing nonprofit activity. Unless your donation is made to a qualified organization, your donation of cash or property (even sneakers) could be excluded as a deduction.
In addition to the qualified organization requirement, the I.R.S. places a few additional restrictions on charitable deductions. For example, donations of cash are deductible at full value, provided it can be documented and your company didn't receive anything in exchange for the contribution.
Property donations, on the other hand, can be deducted at fair market value (FMV). For tax purposes, the I.R.S. defines FMV as the price a buyer would be willing to pay for the product on the open market. It's important to know that the receiving nonprofit will not assign FMV for you. Although the responsibility for assigning FMV falls on your shoulders, resist the temptation to inflate donation values. In the event of an audit, you will be required to defend your decision.
Strategies & Partnerships
Social entrepreneurs often maximize the return on their social commitment through a combination of nonprofit partnerships and giving strategies. By creating synergistic relationships with the right nonprofit(s), small businesses can gain ground in the marketplace and leverage property donation rules to recover a percentage of the cost of unused inventory or equipment. For example, under certain circumstances a crate of excess merchandise or service hours can be converted into an opportunity to raise your company's profile at a community-wide charity event. But although there are plenty of opportunities for creative partnering, the I.R.S. may apply capital gains rules to large donations, so be sure to consult your tax advisor, especially if your contribution is greater than $500.