Background
The One Big Beautiful Bill Act (OB3) signed into law on July 4, 2025, enacted several amendments to Section 170 of the Internal Revenue Code, which governs the federal income tax deduction for charitable contributions. These changes apply to both individual and business donors for tax years beginning in 2026.
C corporations have historically been subject to a limitation allowing charitable contribution deductions of only up to 10% of taxable income. OB3 retains this ceiling but introduces a new minimum threshold, requiring that charitable contributions exceed 1% of taxable income before any deduction is allowed. Accordingly, a C corporation with $1 million of taxable income may deduct qualifying contributions only to the extent they exceed $10,000 and do not exceed $100,000. For example, if such a C corporation contributes $50,000 to qualifying charitable organizations, only $40,000 would be deductible.
Individuals have similarly been subject to percentage limitations on charitable contribution deductions based on the type of property contributed. Cash contributions, for instance, are generally deductible up to 60% of the contribution base. In most cases, the contribution base will be the taxpayer’s adjusted gross income (AGI). OB3 introduces a new floor equal to 0.5% of the contribution base, analogous to the corporate floor previously mentioned.
As a result, an individual with $1 million of contribution base may deduct cash charitable contributions only to the extent they exceed $5,000 and do not exceed $600,000 in the year of contribution. These limitations on individuals apply regardless of whether the contributions are made directly by the individual or indirectly through a passthrough entity (PTE), such as a partnership or S corporation, whose charitable contributions flow through to its owners.
Charitable contributions disallowed in excess of the annual limitation may generally be carried forward to subsequent tax years, subject to applicable carryforward rules that are beyond the scope of this article.
Collectively, these changes establish a new regulatory framework for charitable giving that presents planning considerations and opportunities for businesses, whether operating as C corporations or as PTEs, to mitigate the impact of the newly imposed deduction floors.
How does expense classification help avoid the charitable deduction limitation?
Before OB3, businesses may not have been conscientious in classifying deductions as charitable contributions or other expenses. A classic example is a sponsorship. Sponsorships typically involve financial contributions to charitable, nonprofit, or other tax-exempt entities associated with events, programs, or facilities, such as sponsoring a charity golf tournament. These arrangements often provide sponsors with public acknowledgment, advertising opportunities, or additional benefits.
For federal income tax purposes, the tax treatment of a sponsorship payment depends on what the business receives in return and its intent. If the payment is made with charitable intent and without the expectation of receiving a substantial return benefit, it may qualify as a charitable contribution under §170.1 If the donor receives goods, services, or other benefits in exchange for the payment, the amount deductible as a charitable contribution is generally limited to the excess of the payment over the fair market value of what is received in return.2 If the donor receives only incidental or token benefits, the payment may still qualify as a charitable contribution in full.3
In contrast, if the payment is made in exchange for advertising or other promotional considerations, the payment may instead be deductible as an ordinary and necessary business expense under §162. Accordingly, taxpayers should carefully evaluate whether the facts support §170 charitable contribution treatment, or §162 business expense treatment because such expenses would not be subject to the 1% or 0.5% floor limitations on charitable deductions.
Often, this distinction turns on whether the business is receiving only an acknowledgment or whether it is receiving a substantial return benefit. For example, use or acknowledgment of the sponsor’s name or logo in connection with the exempt organization’s activities may be consistent with charitable contribution treatment. However, if the arrangement includes promotional language, price information, endorsements, comparative statements, or inducements to purchase, the payment is more likely to resemble advertising and may be more appropriately treated as a business expense.
Historically, businesses may not have focused heavily on this distinction because charitable contribution deductions were still deductible up to the charitable contribution deduction ceilings without first having to exceed a floor. Not only does OB3 change that analysis for C corporations, but owner-level considerations can further complicate the picture for PTEs.
Taxpayers should be wary as the results may not always be as expected. In some cases, reclassifying a payment as advertising or another business expense may appear more favorable, but charitable contribution treatment may still produce a better overall result depending on the taxpayer’s facts and circumstances. Particularly, for passthrough owners, that analysis can be affected by whether the individual already exceeds the new 0.5% contribution base hurdle, the interaction with the itemized deduction limitation for high-income taxpayers, and whether the deduction affects the calculation for the qualified business income deduction. As a result, the better classification may not always be the most obvious one.
Because so many variables may affect the after-tax result, the most beneficial treatment often cannot be determined based on labels alone. Instead, taxpayers generally should model the available alternatives to determine whether charitable contribution treatment, business-expense treatment, or another approach produces a supportable and more favorable overall result.
Forvis Mazars Insight: Donations to charities are not necessarily charitable contributions. Businesses should review the underlying agreement to determine what is being provided in exchange for the payment and whether the arrangement supports treatment under §170, §162, or a bifurcated approach.
Are there any benefits to donating business inventory to charity?
Donating business inventory raises a different consideration. Treasury regulations under §1.170A-1A provide rules for certain charitable contributions of inventory, including how to determine the deductible amount and how inventory basis and costs of goods sold are adjusted when inventory is donated.
When a business donates inventory, the tax result depends in part on how the inventory is treated under the taxpayer’s accounting method. If the donated inventory was included in opening inventory, the amount is generally removed from cost of goods sold and treated as a charitable contribution deduction subject to the applicable §170 limitations, including the new floors.
However, if inventory is purchased or produced and donated in the same year, the cost of that inventory may already be reflected in cost of goods sold, and no separate charitable contribution deduction may be allowed for the donated property. In that case, the new floors are not relevant in the same way because the taxpayer is not claiming a §170 charitable contribution for the donated inventory.
This distinction matters because the floors apply only to amounts claimed as charitable contribution deductions under §170. Therefore, in some cases, inventory donations may present planning opportunities if the facts support treatment through costs of goods sold rather than a charitable contribution deduction. At the same time, taxpayers generally cannot choose one result over the other based solely on preference. The treatment is governed by the inventory’s status and the applicable accounting rules.
Businesses considering inventory donations should evaluate whether the inventory was on hand at the beginning of the year, whether it was purchased or produced and donated in the same year, and whether any additional special rules for inventory donations, including qualified food inventory, may apply.4 The tax treatment of donated inventory should be coordinated with the taxpayer’s documentation and reporting position, including the donation agreement terms and how the inventory costs are reflected under the taxpayer’s accounting method.
Forvis Mazars Insight: With the new floors in place, businesses may want to evaluate whether a sponsorship or inventory donation is best treated as a charitable contribution under §170 or whether the facts support business-expense or cost-of-goods-sold treatment. The answer depends on the actual economic arrangement, the taxpayer’s documentation and accounting treatment, and potentially on the taxpayer’s entity type.
How Forvis Mazars Can Help
Sponsorships and inventory donations can present meaningful planning opportunities, but the new rules under OB3 make classification and documentation more important than ever. Whether your business operates as a C corporation or as a PTE, evaluating the proper treatment of charitable payments, sponsorships, and donated inventory can help determine the proper available deductions and avoid unintended results.
If you or your business is evaluating charitable giving strategies, sponsorship arrangements, or inventory donations under the new rules, Forvis Mazars can help explain the available options, model tax outcomes, and help support the reporting position with appropriate documentation. Please contact a Forvis Mazars professional to discuss how these rules may apply to your business.
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