I came across this post recently, and like any other post on social media, it broke out in the comments as an argument. Some correctly pointed out that these pass-through donations do not qualify as the company’s own charitable contributions for tax purposes, thus not providing direct tax benefits. Those folks were met with arguments from others who don’t understand tax law as well, but think they do.
According to the Internal Revenue Code (IRC), specifically sections 170(c) and 162(a), while corporations are permitted to claim deductions for charitable contributions, this privilege extends only to donations made directly by the corporation from its own assets. In the context of pass-through donations, where the company merely acts as a conduit for transferring customer donations to charities, these transactions do not qualify as direct contributions from the company’s assets.
The IRC and accompanying Treasury Regulations (e.g., Treas. Reg. § 1.170A-1(h)(1)) establish that for a donation to be deductible, it must be an outright gift without the donor (in this case, the company) receiving substantial benefits in return. This regulatory framework underlines that the tax benefits for a business making a charitable contribution are contingent upon the contribution being both voluntary and made without expectation of direct financial return, as interpreted in case law such as United States v. American Bar Endowment, 477 U.S. 105 (1986).
Here’s an example transaction:
|Tax Treatment for Business
|Purchase of Clothing (Excl. Tax)
|Taxed as income (subject to normal business income tax rules)
|Collected on behalf of the government, not income
|Subtotal (Clothing + Tax)
|Overall subtotal partially taxable (only the clothing and tax portion)
|Charitable Donation (Rounded Up)
|Not taxed as income (passed through to charity, not deductible as a business expense)
|Total Charged to Customer
|Overall transaction partially taxable (only the subtotal portion)
- The Purchase of Clothing and Sales Tax are regular business transactions, taxed accordingly.
- The Charitable Donation represents the amount to round up the total to the nearest whole dollar. This amount is not considered business income and is not a deductible business expense.
- The Total Charged to Customer includes the donation, but only the subtotal (clothing price plus sales tax) is taxable for the business.
In summary, the tax system, as codified in the IRC and interpreted by relevant case law, does not support the idea that companies can reap significant tax advantages from pass-through charitable donations. It is concerning that individuals think there are loopholes, without understanding what they are talking about.
I prefer to not round up and instead make lump sum donations so it’s easier to track come tax season.