Community Contributions – Finance 101

The fine line between donations and advertising.

Dear Dan,

I am embarrassed to write this letter and will be even more embarrassed if you publish it. Now I know why you have fake names at the end of each letter.

I am a 120-call business in a small town, and my competitor, who is the same size, is two blocks away. Neither of us are making much of a living, but we continue to fight for each call like our fathers and grandfathers did.

Every week, I get at least five requests from churches, local organizations, religious groups and schools for “advertising.” These are nominal and generally amount to between $25 and $200. Little League wants new T-shirts, the high school yearbook wants ads, the senior center needs donations, etc. While each request is not a lot, last year, the total was about $8,000. My entire advertising budget is about $20,000, so this makes up close to half.

Because I’m in a small town, I know that most of these donations do not result in new business. My fear is that if I decline a request, the locals will talk about me as if I’m cheap, and they will go to my competitor. Why do I feel like I am being shaken down by the Girl Scouts?

By the way, I bet every funeral home owner has this same problem, but no one discusses it.

                                     Signed, Held Hostage in Hattiesburg

Dear Triple H,

In the more than 400 articles I have written in my career, many of which have dealt with marketing and advertising, I have never discussed the fine line between donations and advertising. You are spot-on. These nominal advertising matters are not really advertising. They are donations. When you make these nominal contributions, you should have no expectation of patronage. That’s what makes it a donation.

By their very definition, donations must have a “donative intent.” As such, the donator (funeral home) desires to benefit a charity and gets nothing of value in return. If you do get something in return, the charitable deduction is the difference between the amount paid and the value received. For example, you go to a charity event and bid $200 on a Bob Uecker-autographed baseball and “win.” You then get audited and the IRS agent wants to see the baseball. He or she goes online and sees that the ball is worth $9. (Uecker gets no respect!) Therefore, a deduction of $191 is allowed.

I don’t acknowledge that these ad requests and minor donations are charitable donations because there are limits on what your business can contribute to charity. By calling them “advertising,” you get to deduct them (subject to the Uecker rule). Businesses can make charitable donations and deduct them, too, but there are limits and rules.

The rules of a business taking a charitable donation are reasonable:

• The charity must be a 501(c)(3) organization.
• You must donate cash.
• The amount must be paid in full before the end of the tax year.
• You must keep your records for the length of the audit period.

The nature of the charity is important in determining the charitable deduction amount. The nature of the property contributed, for the sake of this article, is deemed to be cash. If you give service, property or other matters, the rules get more complicated.

The maximum deduction for charitable donations depends on the type of business entity you are. If you are a business entity that files its taxes at the shareholder level (such as an S Corporation, LLC, partnership or sole proprietorship), the maximum is 50% of the adjusted gross income. If you are a C Corporation, the maximum is 10% of adjusted taxable income, not to exceed 100% of the cash contribution. If the cash contributed to charity is more than this amount, you will have a carry-over to future years.

This charitable deduction maximum can be a problem if you work to have your C Corporation break even. If the donations are more than the 10% of adjusted taxable income, they are not deductible. To avoid this problem, many accountants take the simple route and replace these “donations” with the phrase “advertising.” So, Triple H, that is the tax geek answer.

However, you, my friend, want more than just good, solid tax advice. You want a solution to your inability to say no to every “asker” in the community. A dozen years ago, we informed one client that he was spending almost 4% of his total revenue on these donations. He was agog at the amount. His case count was slipping and cash flow was tight, but every noble “asker” in his county knew they could walk in to his firm and sell him something. He even had to let out all of his suits after April, as he bought more than $500 in Girl Scout cookies.

There is a simple solution we help our clients employ. Like so many good training points, it is a script:

Solicitor: Can you buy an ad in our yearbook? They are only $50!

Funeral Home Owner/Manager: I have a question for you: Did we donate last year?

Solicitor: Yes.

Funeral Home Owner/Manager: I’m glad you called me this year. We only provide donations every other year, so if you send me something, I will build you into our budget for next year.

Simple. But what if the solicitor says, “No, you didn’t donate last year.”

Funeral Home Owner/Manager: Unfortunately, our budget for community involvement is already set and we didn’t have any way of knowing about your group. Send me something about your organization and we can consider you for next year.

Again, simple. The key is not to “not give” to those organizations you want to support, it is to keep a solid impression with those to which you don’t contribute.

Advertising is part of your overhead. In most cases, advertising and promotion is about 4% to as much as 6% of your annual overhead. I typically recommend a budget as a percentage of revenue (net of cash advances):

2% for preneed marketing: The affirmative marketing of preneed is no longer a debated decision. You need to be writing new preneed business at least equal to 40% of your total cases each year. Anything more than that is going to lead to an increase in your market share. To get this result, you need to generate leads for a dedicated staff member to follow up on. Make sure the staff you employ to handle these leads is well trained in sales and not just preneed.

2% for media and social media: Media are changing. Advertising is no longer reserved for newspapers and the Yellow Pages. This form of advertising is the “bought” kind, whereby traditional news sources take your advertising money. The new media is you. Through your website, online publishing, blogs and social media management, you can get people to your website. That should be your goal. Then influence and educate them when they’re on your site. Just having a website is not enough – you need to drive people to it. Social media managers are very good at doing that.

2% for community programming: We know that the number-one reason someone chooses a funeral home is because they know the staff or owner. If they have used someone and it wasn’t you, they will change allegiance if they are influenced by your behavior. Community programs leave a very positive impression with consumers. These strong programs also lead to people establishing and transferring preneed accounts.

If you are conforming to these budgets and case count is not growing, that means you may be wasting money.

One client donates a $1,000 full-page ad to his local symphony. The ad is wonderful, but the problem is that the ad is seen by the same 1,000 people four times a year. I suggested he advertise in the program of a country and western concert series also. They draw almost 12,000 people throughout the year, and very few people go to all of the events.

If you can’t say no to a 16-year-old soliciting you for a $50 yearbook entry, then send me $25 and have the kid call me. I can quickly cut your donation costs in half!

Dan Isard, MSFS, is president of The Foresight Companies, a Phoenix-based business and management consulting firm specializing in mergers and acquisitions, valuations, accounting, financing and consumer surveys. Isard can be reached at 800-426-0165 or danisard@theforesightcompanies.com. For copies of this article and other educational information, visit theforesightcompanies.com.

Financial and tax advice contained in this article is for informational purposes only and may or may not apply to your individual position. Readers are strongly encouraged to seek the counsel of qualified advisors before undertaking any action based on this information