A recently released Internal Revenue Service Information Letter has practical implications for social enterprises formed as benefit corporations that wish to support charitable organizations and causes in connection with the benefit corporation’s public benefit purpose.
In the Information Letter, the IRS stated that payments made by a benefit corporation to an Internal Revenue Code Section 501(c)(3) nonprofit charitable organization for the purpose of “institutional or goodwill advertising to keep the benefit corporation’s name before the public” will be treated as valid business expenses under IRC Section 162(a). Section 1.162- 20(a)(2) of the Income Tax Regulations provides, in part, that expenditures for institutional or goodwill advertising which keeps the taxpayer’s name before the public are generally deductible as ordinary and necessary business expenses provided the expenditures are related to the patronage the taxpayer might reasonably expect in the future. So long as the benefit corporation satisfies the above standard, the benefit corporation’s payments to charities will be treated as fully deductible business expenses rather than partially deductible charitable contributions (limited to 10% of the corporation’s taxable income under IRC Section 170).
Since 2010, when the first benefit corporation state statutes were enacted, benefit corporations have been subject to the same federal tax laws as regular business corporations. With the issuance of the recent IRS letter above, we are now seeing the emergence of certain tax benefits offered to benefit corporations, signaling that regulatory agencies view benefit corporations as generating sufficient public benefit to justify some level of tax preference. We will have to wait and see whether further tax benefits will be extended to benefit corporations in the coming years.