eli5 How does donating to charity help corporations? They don’t keep the money, so what’s the benefit?


I always hear how corporations only donate to write off on their taxes. But how does that make sense? They don’t keep the money, it’s gone – they’ve given it away.

Does the government say “if you donate x amount of money, we will reduce your tax rate by x percentage”? This is the only explanation that makes sense to me, but from what I’ve read that’s not the case.

In: 2

Okay let’s say Company made $50M this year. That’s after their bills and employees are paid. They’ll be taxed on that $50M, let’s say 20% (not the actual number in the States, but corporations are taxed a flat rate no matter the income, but only on operating revenue) so their tax liability is $10M. That leaves them $40M in profits.

Alternatively they have that $50M and give $6M to charity. That gets knocked off their taxable income so now they’ll be taxed on the $44M. The tax liability for that is $8.8M which leaves them $35.2M. That’s precisely why charity is deductible, because it goes toward things that benefits society and at the end of the day costs a company more than not donating.

But it also looks good if they gave up $6M (more than 10%) of their profits to help causes. Makes people like them.

Generally, people and companies **aren’t** taxed according to the money they *receive* – they are taxed according to the money *left over after paying for “reasonable” expenses*. Reasonable expenses might be mortgages or healthcare for people, and include equipment costs and salaries for companies. So the higher your expenses, the less money left over to count as “taxable” profit.

Because it’s good for a society if people are charitable, governments allow both people and companies to count charitable donations as additional “reasonable expenses”. Usually it’s not exactly dollar-for-dollar, but at least some of those donations help reduce the taxable profit.

Some additional commentary – ~~the charitable drop boxes and change boxes at stores allow the store owners to donate money that really was never really theirs.~~ It’s still morally good to give, ~~but if you want to give while helping yourself too, then it’s better to donate directly to charities and claim those as your personal expenses~~. edit: corrected below

They don’t even really do it for the taxes they do it for good PR. As an example door dash gave sesame street 1 million this year. They then spend 5.5 million on adverting telling people that they gave 1 million.

They do it to grow sales and/or make customers feel better about spending money with them. They want customers to feel better about shopping at Target because they give money to schools, or buying from whatever brand because they donate to a cause the consumer feels is important. Also, when companies offer an amount per sale, or percentage of sales/profits, it hopes that the incentive will drive sales in addition to helping the cause, ie. if $1 for every box of Teddy Graham sold goes to protect bear habitats, then the hope is that more people will buy Teddy Grahams because of the donation. It’s a win/win situation, where the company gets more sales and a worthy cause raises more money.

There may be some tax benefits to donating, too, but it’s not the primary driver for the company to donate.

If a company is privately owned by a single person or family, then sometimes it can simply be because there’s a cause that they believe in and want to give money to.

Publicly traded companies, on the other hand, are supposed to act in the financial interests of their various shareholders, so they aren’t supposed to give away money just because the executives want to. Usually their charitable donations form part of a marketing campaign. They might mention the donations in their advertising or in their product branding, and they might secure an agreement from the charity that the charity will publicly recognise their support.

> Does the government say “if you donate x amount of money, we will reduce your tax rate by x percentage”?

There are schemes like this, but usually they’re set up so that the amount of money you save is less than the amount you gave to the charity. The point is to make it that little bit more attractive to donate money to charity, since your money goes further. e.g. you might be able to tell everyone that you donated a million to a charity, when effectively you only actually spent 700 thousand.

Having said that, it also isn’t unheard of for people to abuse charities to evade taxes or give money to non-charitable causes. For example, in my above example, suppose instead of giving the 1 million to a reputable charity, you give it to a fake charity that just gives the money back to you. Now you’ve saved 300 thousand on your taxes. This kind of thing is generally illegal, but it does happen sometimes.

Somebody inside the company is getting a perk or kickback for promoting the charity. Charities often offer representatives of large companies rewards for promoting the charity or collecting donations. The company representatives can win a free trip or other reward for participating especially if they bring in the biggest collection of donations or get the biggest response from an advertising campaign. It’s also good public relations for the company.