Smiling volunteer accepting canned food at a shelter.
Charities vary in size, cause, and level of commitment, and they can always use donations and volunteers. But how will getting involved affect your business? — Getty Images/ SDI Productions

In an ideal world, donating to charity is something virtually all businesses would like to do. In reality, however, donating to charity is not so straightforward. There are financial constraints, tax implications, and other things to consider when planning your charitable contributions. Here are some of the pros and cons of giving back as a business.

[Read more: 5 Small Business Owners on How They Give Back to Their Communities]

Pros and cons to donating to charities as a business

Pro: Giving back boosts employee morale.

Employees want — and even expect — the companies for which they work to give back philanthropically. In a survey by Fidelity Investments, 66% of those polled said it’s important for companies to support different causes. And, among millennials, 75% said it was important that their employer had a charitable contribution matching program. Other studies have shown measurable increases in motivation and productivity among employees who work at companies with volunteer programs and charitable giving initiatives.

Employees want to feel good about going to work. One of the easiest ways to create that goodwill is to support causes, organizations, and volunteer efforts about which your team cares.

Con: It can become a distraction.

Many small business owners feel there’s not enough time in the day nor resources to dedicate to volunteering or charitable donations. For smaller teams, it’s important to weigh the level of impact donating to a charity can have against the time, money, and decision-making that will go into a project with no direct benefit to your bottom line.

Pro: There are tax deductions for charitable giving.

The IRS permits businesses to deduct charitable donations from their federal tax returns, as long as the recipient organization is approved as a tax-exempt organization. You can search for an organization's eligibility to receive tax-deductible charitable contributions using the IRS’s Tax Exempt Organization Search Tool. You may be able to deduct up to 60% of your adjusted gross income via charitable donations, a great way to lower your tax burden each year.

People's perception is that brands that sacrifice relatively more of their earnings seem more generous.

Elizabeth A. Keenan, assistant professor of business administration, Harvard Business School

Con: It may cause burdensome record-keeping.

If you do decide to make a donation for the tax deduction benefits, keep in mind you’ll have to keep detailed paperwork to verify your donation with the IRS. For monetary donations, save your bank statement, credit card statement, and a receipt from the charity that shows the date, amount, and name of the organization. For cash or property donations over $250, the IRS will ask to see a written letter of acknowledgment from the charity. There are other rules for donations higher than $500; make sure you consult a CPA ahead of time.

Pro: You can earn goodwill with customers.

Gen Z and millennial consumers, in particular, pay close attention to the charitable contributions and ethos of the brands from which they purchase. Positive social and environmental impact plays a big role in their purchase decisions and brand loyalty.

Earning goodwill for charitable donations isn’t as straightforward as it used to be, however. A study found that consumers focus less on the total amount a company has donated, and more on how the amount of the donation relates proportionally to its earnings.

“People's perception is that brands that sacrifice relatively more of their earnings seem more generous,” said Elizabeth Keenan, assistant professor of business administration at Harvard Business School. “There's some goodwill associated with that type of generosity and therefore, people are more likely to prefer those brands over others.”

Essentially, customers want to know: When they buy from your business, are you using that revenue for good?

Con: You risk looking self-serving.

Telling customers about your charitable efforts comes with the risk that your brand is too self-promotional. Consumers know when you aren’t donating to a charity out of generosity; if your gift seems insincere, it can damage your brand reputation rather than improve it. Communicate your donation with care, and choose a charity to support that aligns with your mission and values in an authentic, natural way.

[Read more: How to Choose the Right Charity for Your Business]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published August 06, 2022