Defining a Financial Plan for Corporate Giving:
This is part two of a three part series called “A Guide to Corporate Financial Giving”. In the last post I wrote about “A desire for more” and described how we previously had a very “herky jerky” approach to giving at CablesAndKits. In 2012 we designed a system to create order and predictability that we have used ever since. Our financial plan for corporate giving is described in part two, and defining guidelines for corporate financial giving in part three of this series.
The plan details the changes we made for a more consistent and enjoyable approach to our corporate giving strategy. Part two covers the financial strategy of goal setting, accounting, and accruals, along with maximizing tax deduct-ability. In my next post, part three covers the process of beneficiary definition to bring clarity and focus to your purpose of giving. Here are the steps we took to define our program.
Define your target giving amount:
The first thing you need to do is decide how much to give. At CablesAndKits, we wanted to model our corporate financial giving program after the biblical concept of tithing. So, we decided to give away 10% of our NET profit (EBT, or earnings before taxes).
At first, this seemed crazy. “How can we do that”? To use an analogy – we figured that if the Lord gave us 10 apples that we didnâ€™t have, and that we didnâ€™t deserve, we could surely give one away. So, 10% of NET margin became our target giving amount. It’s never been an issue so far! I have a desire to give far more than 10%, but the business is not quite to a place where that is practical yet, so we have to be careful not to get ahead of ourselves. Once you get started, you can always modify it as you go along.
You will have to decide what is right for you. If you don’t like 10%, pick a different percentage – 8%, 5%, 3%, even 1%! I believe that starting with something and changing later is better than not starting at all. I do propose you pick a percentage of profits though. Choosing a dollar amount doesn’t really work – it will feel like you are either giving too much, or not enough, and will end up feeling herky jerky like I spoke of in the first post.
Define the method of accounting:
Defining the method of accounting was probably the single most effective thing we did. It’s not complicated and is very easy to keep up with once you get it setup.
To keep track of what we have available to give we leverage the accounting concept of accruals. Your balance sheet keeps track of assets and liabilities (what you own, what is owed to you, what you owe to others). You can create a liability account in your chart of accounts that shows up on the balance sheet called Charitable Accruals (or whatever you like) and make monthly journal entries from a charitable giving expense account to this balance sheet “accrual” account.
(Before you get overwhelmed, let me sooth your nerves – this is exactly how a credit card works on your books. The credit card “account” shows up on your balance sheet as a liability. When you make purchases, you record them to an expense category, and the entry increases the balance of the credit card’s liability account on the balance sheet.)
The benefits of accruing charitable giving using this method:
It creates an entry that shows up on your P&L as an expense for an amount of money you WILL give (later) based on the profitability you had that month.
When you run your P&L you will see that expense recorded in the month you “accrued” it. Since you didnâ€™t actually send this money OUT of your bank account, it sits in the “accrual” account you created on the balance sheet. This allows you to see your giving as an expense that is directly tied to profitability for that specific month, before you even give the money away.
It allows you to send the money out at a time that differs from when you considered it an expense.
Since you will have already booked an expense in the amount you plan to give, this money will sit on the balance sheet ready to be dispersed at a later date. Whenever you are ready to give, you simply write a check and code it against the liability account (Just like you would when you pay a credit card bill). The current balance of the accrual account is the amount you have left to “give away”.
This method requires that you consider your ‘cash position” before writing checks. One method for doing this is to consider that you “owe” the money in the Charitable Giving accrual account just like you would a pay-in-full credit card. If you assume that the balance of this liability accrual account is due at any time, you’ll be more likely to keep that cash available.
[Note: If you have a balance left in your accrual account at the end of the year, you cannot deduct it as an expense that year. You can only deduct what you sent out of your bank account. If you’re actually giving money away (not just accruing it on the books but never actually writing checks) it’s probably not a big deal, but keep it in mind. The accountant will adjust for whatever you have not given away at the end of the year.]
Define the methods/outlets of giving:
How do you plan to give this money away? To 501(c)(3) non-profits and charities? To staff or individuals in need? To non-charitable community causes?
Consider that some types or methods of giving are tax deductible and some are not. I’m not going to tell you that you should only give money to things where there is a “write off” opportunity, but I WILL tell you that you SHOULD consider the best way to give to your cause while maximizing the tax benefit where possible. There is no reason not to! Look at it this way – the more tax you save, the more you have to give from.
Here are a few ways to donate, primarily in a tax deductible way.
Directly to 501(c)(3) non-profits.
Throughout the year if a need or giving opportunity arises, and we have enough money set aside in our charitable giving accrual account, we will simply write a check directly to the cause. Any check to a 501(c)(3) is tax deductible, and if the funds are available in the accrual account, and also available from a cash perspective, we just take care of it directly.
[There have been times when we allowed the accrual account to go negative (gave more than what was accrued so far, sort of giving from future accruals) but not very often since it kind of defeats the point.]
Deferred giving through a Donor Advised Fund.
At various times throughout the year, especially at year end, we give the money we have accrued in our charitable giving accrual account to what is called a â€œDonor Advised Fundâ€ (DAF). A Donor Advised Fund is an IRS recognized charitable vehicle established by a 501(c)(3) and is a wonderful component of a corporate financial giving plan. It allows you to make a charitable contribution and take an immediate tax deduction at the time of the contribution (just like when you directly donate to any 501(c)(3)). The difference is that the DAF allows you, the donor, to “advise” where and how the funds are used at a LATER date – even in the next tax year or beyond (hence the name Donor ADVISED Fund). This gives you the magical ability to take a tax deduction now for money you will give away later.
The organization that handles our DAF does so with NO fees. This makes it possible to take a tax deduction in the year you had the intention, desire, and cash to give, but to not feel rushed in December to figure out WHERE to give.
Giving to a non-charitable cause.
Sometimes you want to give to a cause that is something other than a 501(c)(3) charitable organization. Perhaps you have an employee going through hard times, or know someone who has a large medical expense they cannot afford, and you want to help. In order to do so while still maintaining the ability to take a tax deduction, you need to jump through a few hoops. If it is a small amount of money, or the need is serious and immediate, you may choose to forego the possibility of a tax deduction and just write the check. If large enough, or ongoing, you will want to donate THROUGH a 501(c)(3) so the donation is tax deductible. Here are a few options to do so:
Give to their church. If the recipient is a member of a church, ask them if their church will get involved and help cover their expense. If so, you can make a donation to the church with the cause in mind, but not specified. Most 501(c)(3)’s are setup in such a way that does not allow a “pass through donation”. (This is sometimes called earmarking, and can cause the donation to be non-deductible if scrutinized). It is up to the church as to whether they are setup for something like this, so don’t get upset if the church doesn’t seem willing to help. Sometimes they just can’t due to their by-laws, or haven’t yet figured out how to do it in a way that is permissible.
Use a 501(c)(3) that is setup for individual causes. We have a relationship with a charitable organization that is specifically setup in a way to handle “project giving“. Once made aware of a need, they call and discuss the need with the potential recipient of assistance. If the need is validated, they will setup a “project” on their behalf. Once the project is setup, ANYONE can donate to the cause!
They charge a percentage of donations to cover their overhead (8-10%). Even with the fee, this is still a big win from a tax deduction perspective. This allows you to contribute to the cause and still get the deduction. If you are trying to “NET” the recipient a set amount, you can “gross up” the amount to account for the fee.
Directly to the person in need. Sometimes you have to give directly to the person in need because no tax deductible method exists, or the need is immediate. You can give directly, but understand that this is not tax deductible (and no, you cannot just code it as charitable contributions on your P&L and hope for the best). Don’t let the fact that something is not tax deductible stand in your way of helping someone in need. Just know that you are giving to the cause with after tax dollars.
Here are a few takeaways to consider:
- Defining your target giving percentage will create clarity around how much you can afford to give.
- Implementing accruals for charitable giving will create visibility into how much you have remaining to give based on the profitability of previous periods.
- Accruing creates the ability to smooth charitable giving on your P&L, and give when needs arise, without having to wonder if you can “afford it”.
- Setting up a DAF (Donor Advised Fund) allows you to tax a give funds and take a tax deduction now, and choose where the funds go later.
- Using a “Project Fund” through a reputable non-profit organization allows you to give directly to causes not normally tax deductible.
I hope the information here has been helpful, insightful, or inspiring to you on your path to corporate financial giving. We are still learning as we go, and I am sure we will continue to make changes to our plan over time, but we are light years ahead of where we used to be.
In the next post I will be talking about the importance of choosing the types of causes you will give to in advance to create clarity that aligns with your company’s purpose. If you have any questions, or if I can be of any assistance please let me know!
A Guide to Corporate Financial Giving