Why do so many small business owners want to mix their business with a nonprofit entity? Don't do it!

QUESTION.
We are new online retailer of DVDs, mostly mainstream movies from the major studios. We would like to partner with several other companies to create a value-added program that will help us drive our sales while raising funds for a local nonprofit.

If our partner companies donate free merchandise which we offer with every DVD sale, and then we donate $1.00 per sale to the charity, what are the tax advantages to each company?

Can we write off marketing expenses, plus our $1.00 donation per item? Can our partners write off the market value of the goods donated, or just the wholesale costs? Thanks for your help.

ANSWER.
Since your company is a for-profit entity, your partner companies cannot donate free merchandise to your company and get any tax benefit. Donations are only deductible if made to charitable organizations qualifying for tax-exempt status under Section 501(c) in the IRS Tax Code. If your company donates $1 to charity, then it gets a dollar of charitable contribution credit for tax purposes. You can write off any marketing expenses you have. You are a for-profit business and marketing expenses are a legitimate expense of doing business. If you donate to charity, ten you are entitled to get a charitable deduction up to a limit based on your company's taxable income.

You also asked if your partners car write off the market value of the goods donated, or just the wholesale costs. See the following IRS publication for your answer.

http://www.irs.gov/pub/irs-pdf/p526.pdf

I hope my comments are helpful. Good lucks! Regards, -Jeff

Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
www.jlippin.com