There are certain terms that have a more general meaning to the wider public but mean something more specific when it comes to business. Two good examples of this are “donation” and “gift.” To some people, the two might are roughly the same thing, but
When it comes to businesses and non-profits, they have very different connotations. It is important for both business leaders and potential donors to understand these differences, otherwise, they run the risk of falling into serious legal complications.
Gifts vs. Donations: What’s the Difference?
The IRS defines a gift as cash or property that is transferred from one person or organization to another. This can range from a simple transfer of funds to something more tangible, such as a car. A donation is much the same: money or legal goods that are transferred from one party to another. However, a donation differs from a gift in that it is given to a qualified charitable organization.1 Furthermore, the law states that while donations are tax-deductible, gifts are not.
Of course, any company can legally accept money from their eager customers, but unless you’re a nonprofit organization, such contributions would not be considered “donations” rather than “gifts.” This is an important distinction, as people will be far less motivated to offer money if there is no opportunity to receive tax deductions.
Are There Any Exceptions?
In order for organizations to get tax-exempt donations, they need to be recognized by the IRS as a business operating for tax-exempt purposes. This will require a company to file a formal application to achieve this status. The IRS section 501(c) lays out the framework that all organizations must follow if they want to get and maintain tax-exempt status.2 To qualify, the federal government requires an LLC to be a non-profit organization, which means its sole purpose has to fall under one of the following categories:
This does not mean that a company cannot make money, but it cannot distribute this money to its members or other businesses. Instead, all profits must be reinvested back into the non-profit company itself. If your organization doesn’t meet these requirements, then it cannot receive donations.
For-Profit Organizations & Gifts
Despite the important tax distinctions between offering a donation to a non-profit and offering a gift to a business, there is still nothing stopping a for-profit business from receiving or even asking for gifts. However, it is important to clarify to any gift-givers that they will not be able to write off their gift. Not specifying this could lead to legal trouble later on. There are many instances of organizations passing themselves off as real charities in an effort to receive “charity money,” don’t give any false implications about where your organization stands.
Additionally, one has to be careful not to run afoul of a state’s laws against soliciting the public for donations without registering with the state attorney general.3 Unless you’ve signed up with the IRS, seeking charity from the public could be viewed as breaking the law, so make sure that all parties know where you stand. Bottom line, even if you refer to it as a “donation,” a company’s financial gift will not qualify for the same tax exemptions that a non-profit would get.
The Value of Giving
If you’re a small business owner and you’re looking for funding, there are many options available. However, unless you are running a non-profit business, charitable donations are not one of them. That doesn’t mean that you cannot receive gifts from customers or other businesses, although there is far less of a financial incentive to do so. But if someone believes enough in your business, there is still the potential that they might reward you with a gift. Just be sure that they fully understand the specific legal requirements involved, lest you wind up in an uncomfortable situation in the future.
1. Legal Information Institute. (n.d.). 26 U.S. Code § 170 – charitable, etc., contributions and gifts. Legal Information Institute. https://www.law.cornell.edu/uscode/text/26/170.
2. Internal Revenue Service. (n.d.). Exemption requirements – 501(c)(3) organizations. Internal Revenue Service. https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations.
3. Internal Revenue Service. (n.d.). Charitable Solicitation – State Requirements. Internal Revenue Service. https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-solicitation-state-requirements.
About the author
Isaac Isaiah Carr, JD MBA is founder, CEO, and business attorney of CCSK Law, a kingdom-driven law firm. Launched 5 years ago, CCSK Law grew from a single member firm to a 10 person team. His areas of focus include business formation and strategy, contract writing, sales, and corporate finance. Often referred to as an entrepreneur with a law degree, Isaac is able to offer business strategy utilizing creative solutions guided by legal and accounting principles that are then well executed in law. Experience in a variety of industries including real estate, hospitality, automotive, e-commerce, professional services, and healthcare. Successfully negotiated and closed multi-million-dollar transactions, ranging from $1.8M to $10M, with private investors, corporate leaders, and municipalities. Ultimately, he builds sustainable structures for systematic growth. Graduated from Valparaiso University Law School summa cum laude with his Juris Doctorate as well as the AACSB-accredited Valparaiso University School of Business with his Master’s in Business Administration. Passionate about education in all forms, Isaac is involved in the nonprofit organizations of SCORE, Neighbors’ Educational Opportunities (NEO) and New Vistas High School, ValpoNext, and Music Neighbors.