Question: Laura has a sole proprietor Schedule C business. The taxpayer advertises that a percentage of the business sales will go to various public charities in their city. Can the taxpayer deduct the charitable contribution to the charities as an ordinary and necessary business expense under §162 or must the taxpayer deduct the charitable contributions on their Schedule A, Itemized Deductions?
Answer: In general, expenditures for institutional or goodwill advertising keeping the taxpayer’s name before the public are generally deductible as ordinary and necessary business expenses if the expenditures are made with the reasonable expectation of a financial return commensurate with the amount of the payments [Reg. §1.162-20(a)(2)].
For example, payments of a percentage of sales as a donation to public interests in cities where the business sales occur would be considered an ordinary and necessary business expense. In one such situation, the IRS held that the payments were a form of goodwill advertising that were deductible as ordinary and necessary business expenses, rather than charitable contributions (PLR 9309006).
In another ruling, the IRS concluded that charitable contributions were ordinary and necessary business expenses when they were made to a special city fund dedicated to oil pollution control, beautification and advertising to recover tourist business lost because of oil spillage on local beaches (Rev. Rul. 73-113). In this ruling, the taxpayer derived a significant portion of its income from the tourist industry in that city. Therefore, the taxpayer expected a financial return commensurate with the amount of the charitable contribution it made, causing the expenditure to be an ordinary and necessary business expense.