Know the Score How to Classify Expenses from that Charity Golf Tournament

As a business owner, you are probably solicited quite frequently to sponsor charitable golf tournaments.  This time of the year, it seems you could golf in a charitable tournament every Monday. For those events you decide to sponsor or participate in, how you classify the expense can result in differing tax benefits.

For the purposes of this article, you should assume that participating in the event is directly related to your practice.

If you are supporting the tournament and your sponsorship includes golfing, are you expensing the allocable cost as an entertainment expense? The acknowledgement you receive from the charity will include the required disclosure related to the value of goods and services as compared to the cost. This information is used to determine the charitable contribution portion of the cost.

For example, you pay $200 for a ticket to a golf tournament organized by a charity and hosted free of charge by local celebrities. The acknowledgement indicated the value of the golf and meals is $95. The remaining $105 would be the charitable contribution element of the cost. Meals and entertainment expenses are generally limited to a 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} deduction with a few limited exceptions.

One of these exceptions is any expenditure for tickets to fund-raising charitable sporting events if the event is organized for the purpose of benefiting a Section 501(c) (3) charitable organization, where 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the net proceeds are contributed to the organization, and volunteers are used for substantially all the work in staging the event. Therefore, you should be sure to classify these expenses in an account separate from you regular meals and entertainment expenses. The account name should indicate that they are not subject to limit. This will avoid any confusion when your accountant prepares your tax return.

Now that we’ve established the portion of the cost to be classified as 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} deductible meals and entertainment, the classification of the remaining cost becomes equally as important. For those practices that are taxed as a C Corporation, the deduction for the charitable portion could be significantly limited. C Corporations typically pay all or most of the profits to the physician owners and leave little or no profit to be taxed to the C Corporation.

C Corporations can deduct charitable contributions as a business expense but the deduction is limited to 10{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the corporation’s taxable income, before the deduction. Contributions are carried forward for five years. In most medical practices, it is highly unlikely that charitable contributions will yield a tax deduction. If the amount was fully classified as a contribution, I would usually suggest the physician shareholders make contributions individually and deducted on their personal return versus through the corporation. Since the golf expense is a mixed business expense (the meals and entertainment piece) and contribution, having the individual physician owner pay personally would yield a tax benefit for the contribution portion but limit the deduction for the non-charitable portion.

If you are an unincorporated entity, the additional cost, if classified as a charitable contribution, will be deducted by the owner(s) on Schedule A of their individual tax returns. Even when paid by the business, the deduction is separately allocated to the owner as a Schedule A deduction. This is because charitable-contribution deductions are generally limited to 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of adjusted gross income. Any excess can be carried forward for five years. You should keep in mind that Massachusetts does not allow individuals a deduction for charitable contributions.

In order to avoid the limitation on charitable contributions, consideration should be given to classifying the excess as an advertising or promotion expense. The Internal Revenue Service has ruled that the payments made by a company to charities and other organizations as part of the promotional and advertising campaign are deductible as ordinary and necessary business expenses. Practices that attempt to deduct, without limitation, payments to various organizations as “good advertising” must be prepared to show their nature as ordinary and necessary business expenses. If the sponsorship involved recognition of the practice as a sponsor through advertising, signage or the event program, there is a strong argument to classify the additional cost as promotion or advertising.  This will yield a 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} deduction for both federal and state purposes regardless of tax classification of the practice.

So, next time you are golfing in a charitable event, instead of worrying about your swing, ponder how your practice administrator classified the expense. Are you getting the best tax benefit for your participation?