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Increased Charitable Giving in the Time of COVID: Philanthropic or Tax-Driven?
Even before the global COVID-19 pandemic hit, retailers across the country were already prioritizing charitable giving despite the existing downward trend in sales and revenue. With the recent global COVID-19 pandemic and the resulting lockdowns, closures, and bankruptcies, retail revenue has further decreased. Still, some companies took this opportunity to contribute to communities in need during the pandemic. When people think about corporations donating to charities or communities, people usually think of monetary donations. Now, however, companies are being more innovative in how they give—and their giving is helping them survive.
Repurposing Companies and Helping the Pandemic Efforts
Shortly after the onset of COVID, many companies, such as Ética and Hugo Boss, repurposed their production lines to manufacture fabric masks to aid the pandemic efforts. Hugo Boss stopped all other production and donated all 130,000 of the masks it produced to various public facilities. It also made a more conventional monetary donation, donating 20% of its U.S. sales (up to $100,000) to the American Red Cross. Alongside selling to the general market, Ética also donated a four-pack of masks to hospitals, healthcare workers, and first responders across the country for every pack it sold on the market. This demonstrates not only the sense of community that companies feel in the wake of the pandemic to provide for groups with unmet needs, but also how companies have had to adapt to the pandemic to be able to meet their own needs and survive the resulting economic downturn.
Through repurposing materials and production lines to create products needed to curb the pandemic, companies are not just being charitable, but are also able to survive in these financially-troubled times. Jeanne Whalen, from the Washington Post, describes companies such as Steele Canvas, which normally produces canvas-and-steel storage carts for the construction industry, looking at its equipment and realizing it could also produce masks. With its “buy-one-donate-one” deal (a common deal), it had such an influx of demand that it thought it would not be able to complete the orders in time! It managed to both survive the onslaught of orders and, more importantly, survive the worst of the downturn. Steele Canvas, and other companies doing the same, ended up hiring more workers and buying fabric and sewing machines to keep up with demand for their new business products. Now that the intensity of the economic downturn and the need for masks have slightly plateaued, Steele Canvas and other companies have been able to slow down and more thoughtfully create a wider variety of masks, such as masks intended for the hot summer season as well as masks with more creative designs. Ultimately, and very importantly, companies that were able to repurpose and create masks also gave their workers a renewed sense of purpose—regardless of whether the product is for sale or donation.
Although producing masks is probably the most popular “new purpose,” other corporations repurposed their equipment, donated already-existing products, or donated money to aid in the pandemic in the following ways:
- Carhartt usually creates sturdy work gloves, but now it uses those materials to produce gowns and masks for frontline medical workers.
- The Body Shop donated 30,000 units of cleansing products to local shelters and senior communities.
- PopSockets did not repurpose their product, but instead created new designs for their existing product reflecting charities, such as Doctors Without Borders and Feeding America, that will receive 100% of the proceeds from sales. This taps into individual consumers’ increased focus on charity.
- Under Armour is doing a combination of giving: it both manufactures face masks, face shields, and speciallyequipped fanny packs, and it pledged a one million dollar donation to each of Feeding America and Good Sports (to provide youth sports leagues with equipment and apparel).
Are all of these contributions purely philanthropic and altruistic in nature? While that certainly may be a part of the reason, there are often enticing tax incentives for corporations to do charitable giving.
The Corporate Charitable Deduction
The CARES Act
In the pre-COVID world, a corporation could deduct only up to 10% of its taxable income for charitable contributions it made during that tax year. The CARES Act temporarily increased that limit from 10% to 25% for cash contributions to qualified organizations (not including donor advised funds or private foundations) in the 2020 calendar year. While this is a significant increase, let’s break down what contributions actually qualify for this increased deduction limit:
- The contribution must be a cash contribution. Usually, companies donate noncash property, such as appreciated property, for multiple tax benefits at once, but those non‑cash contributions do not qualify for the increased deduction limit and will continue to be subject to the 10% limitation.
- The cash contribution must be made in the calendar year 2020. Note that this is slightly retroactive and may not follow a corporation’s fiscal year.
- The recipient must be a qualifying organization. A qualifying organization is an organization that qualifies under Section 170(c) of the Internal Revenue Code. The most commonly known organization is the 501(c)(3) organization, which is “a community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals,” as outlined on the IRS website. See I.R.C. 170(c).
- Note that the contribution is not required to be for a pandemicrelated cause. Thus, the increased contributions to the causes and charities underlying the #BlackLivesMatter social movement, for example, could qualify for this increased deduction, even though the movement was reinvigorated in the summer after the CARES Act was passed.
Although it seems like this new tax advantage would incentivize companies to contribute in the ways outlined above, most of the outlined donations do not, in fact, qualify for the increased deduction limit. For example, all of the donated masks are non-cash property, though they may be donated to a qualifying organization in 2020. Although those donations will qualify for the normal charitable deduction limit, they will not qualify for the increased deduction limit. This suggests that corporations that are contributing items from their own production lines, such as Ética donating its masks and The Body Shop its cleansing items, are doing so more from purely philanthropic motives rather than tax motives. And indeed, that may be the case, as these contributions are also not deductible for their full value because they are likely considered to be “inventory,” which is governed by special rules that results in less than a dollar-for-dollar deduction.
Special Rules re: Inventory
When corporations donate items that they normally hold for sale to customers in the ordinary course of business, they are donating what is called “inventory,” and the deductions for inventory are governed by slightly different rules. Below are some of the basic requirements for a contribution to be a donation of inventory:
- It must be a qualified contribution. See I.R.C. § 1221(a)(1), (2).
- The donation is “to an organization which is described in section 501(c)(3) and is exempt under section 501(a) (other than a private foundation, as defined in section 509(a), which is not an operating foundation).” I.R.C. § 170(e)(3)(A).
- The use of the inventory by the donee is (i) related to its charitable purpose under which it was granted exemption status and (ii) “solely for the care of the ill, the needy, or infants.” I.R.C. § 170(e)(3)(A)(i).
- There is no exchange of property or services by the donee to the donative corporation. I.R.C. § 170(e)(3)(A)(ii).
- The donee represents in a written statement that its use and disposition of the donation will be in accordance with the last two bullet points. I.R.C. § 170(e)(3)(A)(iii).
- Several recordkeeping requirements also apply.
- Usually, the amount of cash or the net value of noncash property donated is deductible dollar-by-dollar, subject to the deduction limit. However, in the case of inventory (and some other types of property), there is a special formula to calculate how much is deductible.
Determining how much of the value of inventory is deductible is dependent on each property and has many variables; it should be determined in conjunction with your Goulston & Storrs attorney and your accountant. Generally, C corporations can deduct the basis (usually the cost to produce or acquire the inventory) for each product, plus one-half of the property’s unrealized appreciation (using the item’s fair market value at the time of contribution), though it should not exceed double the basis value. For example, if a C corporation donates a mask that (i) qualifies as a charitable contribution of inventory, (ii) costs $2 to make, and (iii) has a fair market value of $5, the C corporation may deduct $3.50 ($2 of basis plus one-half of the $3 gain). See I.R.C. 170(e)(3)(B).
Thus, while there is certainly an advantage to donating inventory as many companies have been doing throughout the pandemic, it is clear that it is not the most tax advantageous method, though it may be the only method the corporation can currently afford. Ultimately, analyzing whether the increased instances of charitable contributions qualify as charitable deductions suggests a more sympathetic view of the corporations that are making charitable contributions consistent with the more general trend of growing charity in the country’s population.
There have been growing trends showing that individuals, corporations, and foundations are donating more to charitable causes, particularly those related to the pandemic and, more recently, the #BlackLivesMatter social movement. Although there is typically some tax benefit for a charitable contribution, given the record low-income streams for all entities and most individuals, the huge increase in charitable contributions is more than impressive. In the current environment, these contributions appear to be genuinely philanthropic and community-based. Perhaps now that folks are increasingly considering how their actions may affect the health of others, their new sense of community is leading them to consider how else they could make an impact. Hopefully this trend will last beyond the pandemic and into the foreseeable future.
Acquisitions and dispositions of office buildings, shopping centers, warehouses and raw land, joint ventures, real property secured and mezzanine loans, and like-kind exchanges are the focus of Tim Watkins' practice. Tim also handles all aspects of real estate agreements including joint venture agreements, leases, development agreements, property management agreements and listing agreements.