tag:blogger.com,1999:blog-23958070.post115734647733888840..comments2023-08-28T09:09:55.048-04:00Comments on GMR Musings: Should Corporations give to Charity?GMRhttp://www.blogger.com/profile/16839216603164745797noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-23958070.post-36416231299395404142009-10-21T00:52:19.680-04:002009-10-21T00:52:19.680-04:00The cost of giving to charity will always exceed t...The cost of giving to charity will always exceed the tax benefit, yes. However, it still makes sense for corporations to give to charity if they believe their owners would give to charity. Obviously, if there is one owner of the corporation, this is a lot easier.<br /><br />Suppose a corporation is owned by one guy. This corporation has $1,000 in pre-tax profits. The guy wants to pocket $350 for himself and give the rest to charity.<br /><br />If the corporation takes the $1,000 and then pays taxes on it at 35%, it'll have $650 left. It then dividends out the $650. The guys gets this dividend, pays 20% taxes on this, or $130. He's left with $520. He then donates $260 to the charity, leaving him with $260. He gets a tax break on the $260 he donated, or $91, so his net gain to himself is $351.<br /><br />Now, take the next scenario. Company has $1,000 in pre-tax income. It donates $300 to the charity. It has $700 left. Taxes are $245. It then dividends out $455. The recipient gets that, pays 20% dividend tax and ends up with $364.<br /><br />So in the second case, the charity gets more money and the guy gets more money.<br /><br />Now, if you have one owner, it's quite easy for the corporation to figure out how to donate money. If you have 50 owners, not so much. Note that donating money doesn't make you wealthier. The only thing I was trying to point out is that in some cases, it's better for the company to donate than to dividend the money out so the owners can donate, but only if the company is convinced it knows how the owners would want to give. This can really only be achieved with a small ownership structure.GMRhttps://www.blogger.com/profile/16839216603164745797noreply@blogger.comtag:blogger.com,1999:blog-23958070.post-19898342052403790122009-06-07T14:48:15.090-04:002009-06-07T14:48:15.090-04:00Your analysis on the tax effect is wrong. A corpor...Your analysis on the tax effect is wrong. A corporation does not have any tax incentive to donate to charity. Simply put, the donation is worth more than the tax savings that would derive from the donation. If the corporation were to donate $100, you could effectively discount the cost by the applicable tax savings but the tax savings itself is only incidence of the action itself. In one regard however, if the corporation were to make a donation to a charity that promotes a certain cause or public policy conducive to the viability of the corporation than the donation would probably generate more value than the donation itself.Anonymousnoreply@blogger.com