• Business owners can deduct contributions to charities as an advertising expense if the expense is for a sponsorship.
  • Income property owners also have a limited opportunity to deduct charitable contribution as an advertising expense for sponsorships as well.
  • There are some caveats to deducting sponsorship expenses. The itemized deduction could be more valuable in certain instances due to the partial loss of the Qualified Business Deduction (QBI).
  • There are some hidden benefits, too. Planning sponsorships can maximize certain tax credits and deductions for small business owners. 

 

 

The Tax Cuts and Jobs Act (TCJA) of 2017 changed many of the rules. Personal exemptions were eliminated while the standard deduction was increased. With the state and local taxes deductions limited to $10,000 in aggregate, mortgage interest and charitable contributions carry virtually all the weight when it comes to itemizing deductions now.

Fewer taxpayers can itemize after the TCJA, hence, fewer get a tax benefit for supporting charities. This makes it more difficult for charities to raise funds to carry out their mission.

As with so many tax issues, there is a work-around for some taxpayers. Business owners and even income property owners can utilize a strategy that has worked for a very long time deducting monies paid to charities and other groups.

Whereas individuals face issues when deducting charitable contributions, business entities also have rules to follow that limit charitable donations. A sole proprietorship treats charitable contributions as having been given by the owner of the business and is reported on Schedule A. Partnerships and S corporations claim charitable contributions, but pass the deduction to owners on Schedule K-1 where the deduction is again claimed on Schedule A and the deduction is limited by the new realities of itemizing.

Regular corporations (sometimes referred to as C corporations) face even greater limitations. These entities can only deduct up to 10% of taxable income for any given year, with the excess carried to the next year.

Considering all these limitations when supporting a charitable organization, it requires planning to maximize the tax benefits so you can maximize the benefit to the charity. Individuals can clump charitable deductions in one year so itemizing comes into play those years. Regular corporations may find the restrictions too limiting to support an organization at the level desired under any circumstances. 

Deductible Sponsorships as Charitable Giving

It is tempting to throw up your hands in defeat with all the new limitations on supporting your church or favorite charity. But not so fast!

Sponsorships are technically not charitable giving; they are an advertising or promotional expense to the business. It requires only a modest amount of planning to gain full deductibility of monies paid to non-profit organizations and other social groups. 

It is easiest to think of this small at first. My tax office gets requests each year from local high school and junior high sports teams to buy a sponsorship. In exchange for a $250 fee, for example, they will add my business logo to the flyer handed out to all attendees. Sometimes they add the logo to signage at the sporting event. These small organizations may not even qualify as non-profit organizations so anything other than a sponsorship is not deductible by anyone. But as a sponsorship my business can deduct the full payment as an advertising expense.

A bit larger example is the $1,000 my office pays to CommunityFest some years in exchange for my business name and logo presented at the local community event over the Independence Day holiday. 

These types of sponsorships don’t always bring in enough new business to cover the advertising cost. It does build goodwill for your business so it still counts as a business expense. Public exposure of your business offers the opportunity for new business so it is a deductible expense.

On these small scales an income property owner could also support charities in a similar fashion. If you have a brand name for your properties you can increase exposure and attract better tenants with strategically placed sponsorships. For businesses and income property owners the expense has to be reasonable. That is a wide road, but does have its limits. An income property owner with one small property probably cannot deduction a $200,000 sponsorship expense. 

The numbers can be large, however. Recently I worked with an actor in a highly rated television program. He wanted to donate $1 million to his church that needed funding for an addition. He eventually settled on a sponsorship of $300,000 because a million dollars is a lot of money even for a successful actor.

Our actor friend was looking for a career shift and the sponsorship held possibilities. Even such a large sponsorship expense was acceptable due to the size of his income and the possibilities for more acting jobs in the future. I noticed he was picked up for a movie in a very popular series. I would say the expense qualified considering the results (though the expense is not required to generate large results which would be impossible to predict).

I use sponsorships to control my level of profits in my business, too. Keeping my income lower has its advantages, especially when there is a desire to support non-profit organizations. A surprise benefit is that I qualified for the recent stimulus checks due to my heavy level of sponsorship spending in past years. 

Note: A sponsorship cannot support any particular individual, like a Special Olympics athlete. Fees to attend the event are also not allowed as a business expense. A logo on team uniforms would count as a business expense, however.

 

Sponsorship vs Deduction

Throwing money into the plate on Sunday morning is a charitable contribution no matter what way you cut it. I have business owners who try to add weekly tithes to their expense sheet. A quick inquiry eliminates the business expense and puts it back on Schedule A where is has less, if any, value.

However, there is nothing that says you have to drop money into the plate when it is passed. You can use sponsorships at the same level as your regular contributions. When your church has an event your business can sponsor the event for a business deduction. The biggest issue for some is not giving money during the church service. I suggest you give a token amount at the service or even drop an empty envelope in the plate. You are still meeting your charitable goals because of your support through sponsorships.

The non-profit also needs to follow some rules. As a sponsor you would qualify for an advertising deduction regardless the non-profit’s behavior. But you need to be aware certain behavior subjects the non-profit to UBIT (Unrelated Business Income Tax). 

  1. The non-profit should never promise a certain attendance level to the event, media ratings or any other promise of the level of exposure that will be provided. The business still gets the deduction for the sponsorship, but the non-profit is subject to UBIT is such instances where the promise is made.
  2. A sponsorship should not require the business to allow the non-profit the use of business’s logo or products for unrelated event promotions. If the business allows the activity without the requirement it probably is okay. But if the sponsorship has the requirement the non-profit could be subject to UBIT.
  3. Conventions, trade shows, annual meetings and similar events can be sponsored by a business with the expense a deduction. The non-profit in these situations might be (probably is) subjected to UBIT.

I mention the three issues above so business owners do not demand the inclusion as part of the sponsorship. The biggest issue for the business owner is the promise of a certain attendance or ratings level. If the non-profit includes any of these items the non-profit may have tax issues to consider; the business owner still gets the deduction regardless, but the non-profit could suffer tax consequences.

 

Problems, Benefits and Solutions

The biggest concern with deducting sponsorships as a business expense is that it reduces your QBI, as mentioned in the opening bullet points. I can’t think of an instance where this would result in a worse outcome, but I throw it out there because it could be an issue for a minority of readers. QBI is generally 20% of profits. Therefore, a $10,000 business expense would only be worth an additional $8,000 because the non-cash QBI deduction is $2,000 without the deduction. 

There are significant tax benefits from deducting sponsorship expenses. If your income is too high for the QBI deduction, a properly planned sponsorship could reduce your income so you do qualify. That would never happen deducting the expense as a charitable contribution as an itemized deduction.

I actively seek sponsorship opportunities to support organizations I like. Rather than a charitable contribution I invest (notice my choice of words) the same monies as a sponsorship. The organization gets the full benefit, my business gets a deduction and I pay less in tax. 

The “lower tax benefit” is larger than first perceived. By lowering your income before it ends up on Form 1040 you also potentially increase the number of tax credits you qualify for. For lower income taxpayers the Earned Income Credit and Saver’s Credit become possible and may increase the credit. For taxpayers with higher income it can lower taxes on qualified dividends and long-term capital gains, and reduce or eliminate the Net Investment Income Tax (NIIT). 

In all but the rarest of situations it is better to have a business expense than an itemized deduction. Turning charitable contributions into legal business expenses is the Holy Grail. With proper planning you can control your tax burden, maximizing the tax benefits each year. I was able to qualify for the stimulus check because my income was low enough thanks to the business deductions received from sponsorship deductions. If you didn’t qualify for a stimulus check due to income level, you may wish to review the options outlined above because you have one last chance to qualify on your 2020 tax return. 

Finally, as my actor client illustrates, a desire to fund a non-profit organization can lead to very profitable outcomes. Of course then you have to deal with all that extra money. I’ll keep publishing blog posts with tax ideas your accountant forgot to mention to help out. You hold up your end of the bargain by funneling monies to awesome organizations and I’ll keep showing you how to pay less tax when the wheelbarrow of cash rolls in. 

And it is all for a good cause.

 

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

The Tax Cuts and Jobs Act enacted late last year opened a variety of opportunities for average people to reduce their tax burden. The biggest advantage of the tax cuts for individuals is the reduced tax rates and extension of income in the lower brackets. Itemized deductions also pay a serious role in how the changes in the code will affect your final results next spring.

Gaming the standard deduction was less of an issue in the past. Now, with the standard deduction at $24,000 for joint returns ($12,000 for single filers and $18,000 for head of household) there is ample opportunity to reduce your tax bill. Exemptions are gone so many will face higher taxes in this area. State and local taxes (SALT) are limited to $10,000 in 2018 – 2025. With the standard deduction so high and SALT limited to such a low level, most people will no longer need to itemize.

For every problem there is a solution. Today we will cover each deduction on Schedule A and look for alternatives. Pulling deductions from Schedule A (even if you don’t itemize) and deducting them elsewhere on the return is akin to legally double dipping. That is our mission. We want to have our cake and eat it too. If we play this right you should manage a big juicy standard deduction while deducting a large portion of each expense as well.

Medical and Dental Expenses

Medical expenses were always a high hurdle to overcome with the 7 ½% (10% in some cases in the past) of AGI reduction of qualified medical expenses. There are several ways to remove numbers from this section and deduct them elsewhere.

If you have a qualified medical plan you can contribute to a health savings account (HSA).

Your employer may offer a Health Reimbursement Arrangement (HRA). The employer sets the amount available to employees. Unused portions can be rolled into the following year if the employer allows. If unused funds are not allowed to roll to the next year it becomes a “use it or lose it” plan.

Certain restrictions exist for self-employed persons. People with a side gig/side hustle or small business can use a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). QSEHRAs require administration. The cost is minimal, but the rules complex enough that you will want professional help. My office recommends Take Command Health for administration. The tax savings are well worth it.

Employers may cover annual physicals and other medical expenses as an employment requirement. The cost is born by the employer and the employer also gets the deduction.

Investment property owners and those with self-employment income can also shift some medical expenses from Schedule A. Small business owners can deduct most medical insurance premiums on the front page of Form 1040 as an adjustment to income. A landlord who is hurt while working on an investment property will have a medical expenses related to the investment property and are therefore deductible against the rental income. A self-employed semi driver can shift medical expenses required to drive a commercial vehicle from Schedule A to the business part of the tax return.

State and Local Taxes (SALT)

This is the issue that started all the problems. There is a cap on SALT deductions of $10,000 from 2018 – 2025 unless Congress changes the code. Several high tax states have devised plans to work around the issue, shifting the expense to the charitable contributions line of Schedule A. The IRS nixed the idea and at least two states have sued. Because the IRS allowed similar schemes in the past when it involves college funding the court will have a serious consideration on its hands. When the issue clears up I’ll let you know.

The problem affects all states. The higher your income, the more likely this becomes an issue. Texas, a state with a reputation for low taxes is really a high tax state. The sales tax and property taxes more than offset the income tax free part of the Texas tax code.

We don’t have to wait for the courts to decide the outcome before we skin this cat. (My apologies to all the cat lovers of the world. For the record, my cat, Pinky, just clawed me in protest as I wrote this.) Property taxes can be partially shifted to an office in the home if you have a business or investment properties. The office in the home must be “regular and exclusive” and it is worth the effort to meet the tax code requirements.

Be sure to report personal property taxes related to a business or investment property on the appropriate form and not on Schedule A where it has limited value.

Interest You Paid

There is more incentive than ever to pay off the mortgage early. You can shift some of the mortgage interest to an office in the home as proffered above.

Investment interest has significantly reduced value under the new tax rules. Margin accounts should be avoided. They’re a bad idea to start with (buying investments with borrowed funds) and the deductibility of the expense is now also limited.

Gifts to Charity

There is some minor good news on charitable deductions. Cash donations were limited to 50% of AGI in the past with the remainder carried forward for up to five years. The deduction limit for cash is now increased to 60% of AGI.

Still, the goal is to reduce Schedule A to a nonevent on your tax return. If we reduce deductions to less than the new higher standard deduction we can, in effect, double dip.

I’ve published on this strategy in the past. The strategy is more powerful than ever under the new rules. Taxpayers with business income or investment properties can shift normal contributions to charity into promotional/advertizing expenses for the business.

It works like this. Instead of donating to the charity of your choice, ask the charity about any upcoming events and sponsor said events. Your business or rental properties get a nice plug in the brochures handed out at the event and probably a prominent display of your company logo and contact information. While this may not be the best way to grow a business, it is a powerful way to build community goodwill for your company! It’s also a business deduction. You can support your favorite charities and get a deduction, too.

Landlords need caution when applying this strategy. Deducting a $20,000 sponsorship when you only have one small duplex in the low rent side of town is unlikely to pass the sniff test! On the other hand, if you have five duplexes around town and you sponsor an event for $1,000, it probably falls within acceptable parameters. Landlords should have a business name: ABC Rental, LLC, for example. By having all your properties under one umbrella it allows the sponsorship to promote all your properties.

Casualty and Theft Losses

The Tax Cuts and Jobs Act eliminated casualty and theft loss deductions except for casualty losses in federally declared disaster areas. Even if you are in a federally declared disaster area, the first $100, plus 10% of AGI, doesn’t count. Example: If your AGI is $100,000, the first $10,100 of casualty losses in federally declared disaster areas doesn’t count.

There are few options if you suffer one of these losses. Business owners can deduct the loss as a business expense.

The loss/theft might qualify as a capital loss. This is a stretch for most situations, but you should be aware of the possibility in case it happens. Capital losses are reported on Schedule D where there are no restrictions like Schedule A. Schedule D losses are limited to $3,000 per year, plus all capital gains.

Casualty and theft losses are reduced by insurance coverage. If all or most of the loss is covered by insurance there is little or no opportunity to deduct expenses. More than ever, adequate insurance of assets is indicated.

Miscellaneous Expenses, Subject to 2%

Miscellaneous expenses, subject to 2% of AGI are eliminated for 2018 – 2025 under the current code. There are still a few planning opportunities for those who plan.

Unreimbursed employee expenses is the biggest issue in this section. It is important to have a serious discussion with your employer on your out-of-pocket work expenses. Your employer gets a full deduction on most of these expenses while you get nothing if they are not reimbursed! It might be worth a salary adjustment to make room for reimbursed expenses. Example: If you typically have $5,000 per year of work expenses, any salary reduction less than $5,000 with full reimbursement of work related expenses is a win for you and a nice tax deduction for the employer. Employers: this can be a valuable employee perk that pays both you and the employee. A true win/win.

Tax preparation fees are only deductible as they apply to the business or rental property portion of the return. A lot of accountants miss this. If your tax preparation fee is $500, a portion is for the personal part of your return (no longer deductible) and a portion is for the business (Schedule C and other related business forms) and rental property part of the return (Schedule E). Ask your accountant to break out the prep fee (required by the IRS to deduct). Your accountant can list $250, for example, as the portion of the prep fee attributed to the business portion of your personal tax return. This $250 can be deducted on the appropriate forms (Schedule C for small business, Schedule F for farms and Schedule E for income properties).

A safe deposit box used for business or income properties is deducted on their respective area of the return instead of Schedule A.

This section of Schedule A catches a lot of minor deductions. Think the deduction through before writing it off (pun intended). On Schedule A it is now worthless. But, if it is an expense related to a business or rental property . . .

Union dues are the remaining big item. I wish I had an answer. If any of you kind readers have a suggestion, let me know. Union dues are no longer deductible until the tax code changes or I figure out a work around. Don’t hold your breath.

Other Miscellaneous Deductions

This is the last section of deductions on Schedule A. These deductions are not reduced by 2% of AGI.

We will focus on the two most common items reported in this section: gambling losses and claim repayments.

Gambling losses are reportable on Schedule A up to gambling winnings. The best way to avoid tax problems is to stop gambling! The odds are against you. As budding accountants you know better. There, I said it. Now on with the show.

If you insist on gambling, at least keep a daily log of your results/sessions. You can use gambling sessions to remove losses attributable to gains in the same session on the front page of Form 1040. Most states follow federal on gambling sessions so the tax advantage stretches to the state return for most taxpayers.

Gambling sessions don’t remove all the losses from Schedule A, but it should shift a serious portion of the losses from Schedule A to the front page of 1040 where they have value. You can read more about gambling sessions here.

The other big item in this section of Schedule A is claim repayments. We are not talking about business or investment property repayment issues. Those are reported on their respective forms.

A common repayment is unemployment benefits. The claim repayments reported on this section of Schedule A are taxable items of income on a previous tax return. Repayments of items not reported as income on a prior return are not deductible.

We’ll use unemployment benefits as our example. Repayments made in the year the income was received is adjusted where the income is reported. Example: You receive $2,800 of unemployment benefits and are later required to repay $200 of the benefits. You repaid in the same year you received benefits. You adjust the reported $2,800 to $2,600. No itemizing required.

All claim repayments reported as income in a prior year under $3,000 must be reported on Schedule A. Repayments over $3,000 can also be reported on Schedule A, but you want to use an alternative method. There is a planning opportunity here.

For repayments over $3,000 you can calculate a credit for the repayment, reporting the credit on page 2 of Form 1040 (line 73 on the 2017 return). In the margin write 1341, to inform the IRS of the code section you are using for your right of claim.

You calculate the credit by going back to the return the income was reported on. Calculate the prior return without the income repaid in the current year. The reduction in tax is the credit.

Final Notes

I covered what I feel will be over 90% of the issues surrounding Schedule A and the available solutions for moving the deduction to another area of the return. This, in effect, allows a bit of double dipping. You still get the new, outsized standard deduction while still claiming a serious portion of the actual expenses.

Unfortunately, not everyone will benefit from these strategies. However, with the volume of options provided there should be at a least a few options available to most readers.

If you have any creative ideas to divert deductions from Schedule A to areas of the tax return where they have value I’d be happy to hear them.

Remember, an expense is worthless until you get a write-off.

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.