Myth Buster: Customer Donations Do Not Reduce Corporate Taxes

On Sunday, I took my niece out for frozen yogurt. As I was paying, the very nice kid behind the cash register asked me if I wanted to "round up" my purchase for charity. I can't even recall which charity it was, but I would reflexively say yes on a typical day. I was part of the way through research for this piece, though, and had read (and heard) just enough to make me dangerous. I decided not to do it based on what I "thought" I knew.

The myth

The thing about myths is that they are so much more interesting than the truth. The intel I'd gathered told the story of corporate giants taking advantage of kind-hearted customers. If you're a fan of Facebook or TikTok, you may have seen the videos. In them, some furious person reveals the "truth" about what happens to your money when you donate at checkout. According to most I've run across, corporations collect customer donations, donate them to the charity in question, and take the tax deduction as their own.

After deciding not to donate at the frozen yogurt shop on Sunday, I turned to the Tax Policy Center (TPC) to help me separate fact from fiction.

The real scoop

According to TPC, a company can deduct charitable gifts up to 10% of their taxable income in any given year -- but that only applies to money that comes directly out of the company's coffers. They cannot deduct any money that comes out of a customer's bank account.

Let's say you donate $2 to a food bank while checking out at the grocery store. You are the only one eligible to deduct that donation on your tax return. That money in no way lightens a corporation's tax burden.

Insider tip: If you itemize your taxes each year, one easy way to keep track of small donations made throughout the year is to circle them on your bank or credit card statement each month and place those statements in a file marked "donations."

The reimbursement "scam"

Last year, an attorney named Kevin McCabe sued CVS Health Corporation, alleging that the pharmacy giant was soliciting customer donations to the American Diabetic Association (ADA) and using those donations to fulfill its own $10 million pledge. The story gained a great deal of coverage, and suddenly, publications began to use words like "scheme" in their headlines.

As I was wondering where the case stands, I checked with the U.S. District Court for the Eastern District of New York, where the suit was filed. CVS asked that the lawsuit be dropped, explaining that it never pledged $10 million to the ADA but instead promised to raise a minimum of $10 million for the ADA over three years. If CVS fails to raise $10 million during that time, the company has pledged to make up the difference.

Based on the CVS filing, the retailer never expected customers to reimburse its donation, but rather planned on partnering with customers to raise $10 over three years. In any case, CVS can only deduct the amount of money it donates at tax time.

Impact on charities

You might be surprised by how much nonprofits must spend to remain operational. Reminding people that they exist and require financial support is an expensive business. When retailers agree to solicit small donations at checkout, those funds go directly to a charitable organization, reducing its cost of advertising. According to Charity Watch -- a nonprofit organization that provides information about charities -- checkout donations also offer the following benefits:

• When many people donate small amounts of money, it puts less of a financial burden on individual donors. At the same time, it may raise a significant amount for the charity itself.
• Rather than the charity, the store absorbs the fundraising costs of point-of-sale donations.
• When a retailer collects for a small charity, that nonprofit gains access to a larger pool of potential donors than it would likely reach on its own.

The choice is yours

When a retailer collects money on behalf of a charity, it's one that retailer chose. You may have other charities that are more important to you. It's okay to say no when asked to donate, particularly if you're concerned about your monthly budget or don't recognize or support the charity to which you're being asked to give money.

The bottom line is that social media has it wrong. Point-of-sale donations do not help corporations avoid taxes and are not designed to reimburse a company for money it's pledged. If you ever have a doubt, you're always free to donate directly to the causes that matter most to you.