|December 23, 2008|
Previously published on November 2008
The holidays are approaching, and so is the season when many individuals and companies make annual donations to charities. It is also increasingly common for companies to "match" the contributions of their employees. While it is laudable to support philanthropy, it is also important for companies to perform due diligence to ensure that their corporate donations and matching contributions are both appropriate and legal.
Knowing the Pitfalls
Several significant pitfalls await the unwary corporate citizen, including the potential to be defrauded; the possibility that your contributions may not be tax-deductible; and, in extreme cases, the potential to incur civil liability for donating money to a federally prohibited entity.
Sadly, charity fraud is a significant problem. Estimates place fraudulently obtained donations in the tens of millions of dollars each year. Although sophisticated corporate givers are rarely targeted with outright fraud, it is nonetheless important to be wary and to make certain that the money your company is giving is used wisely and for the benefit of the community. There are several easy steps that companies should take to make certain that their donations are going to appropriate and well-intentioned organizations:
- Perform basic research on any organization to which your company is considering making a donation. The Federal Trade Commission (FTC) recommends using one of the following three websites:
1) Better Business Bureau Wise Giving Alliance
2) American Institute of Philanthropy
3) Charity Navigator
- Contact the charity in question and ask specific questions about how it will use your company's money. You should also find out how much of that money goes toward the administrative costs of the organization itself, rather than the causes the charity supports.
- The FTC advocates only giving to recognized charities with histories, and being wary of organizations that spring up in response to specific events or disasters. Additionally, be wary of organizations with names that are similar to those of larger, well-established national charities.
- Always ask for written identification and confirmation of payment from any charitable organization.
Are My Donations Really Tax-Deductible?
It is very important to make certain that your company's donations are, in fact, tax-deductible. Beware! Just because a charity calls itself "tax-exempt" does not mean your donation will be tax-deductible, and the IRS takes improper deductions quite seriously. In order for a donation to be truly tax-deductible, the recipient must meet a specific set of IRS qualifications as outlined in the Charities & Non-Profits section of the IRS website.
However, the IRS provides a convenient online resource by which anyone can quickly determine whether or not an entity qualifies for tax-deductible donations. Click here to search by name and location for organizations that are eligible to receive tax-deductible charitable contributions. If there is still a lingering doubt, consult with your corporate accountant.
Finally, federal law prohibits donations to certain charities that provide funding to various extremist groups around the world. Although this may sound alarmist at first blush, the federal government has investigated dozens of U.S. charities in the past five years for ties to terrorist organizations, and has prosecuted several of them in high-profile cases. Many of these charities do not advertise the nature of the actual causes that they support. They also tend to adopt innocuous-sounding names; claim to undertake humanitarian, social and cultural projects; and utilize sophisticated marketing and public relations campaigns. It can be easy to mistake such an entity for a legitimate charity that is striving to do good works. Under Executive Order 13224, any transaction with one of these organizations can result in civil or criminal liability, and will certainly lead to an unpleasant federal investigation.
In sum, although there are certain risks involved with corporate charitable donations, the benefits of giving certainly outweigh the downsides. Fortunately, your company can avoid a costly or embarrassing misstep by performing the basic and easy due diligence described above.