Commentary on Rounding up Your Change & Tax Loophole

[Tidybuoy]

This is my take on the recent trend of rounding up your change for "charity". Seems like many fast-food chains have jumped on the band wagon.

Here me out: This is my take on the potential tax loophole that this could be - any financial gurus or CPA's please correct me if I'm wrong. I have explained my position in simple terms and on an annual basis (sum of all the daily transactions).

1) Company has $15 million in annual sales + $100,000 in annual change round ups.
Accounting would be Debit to Cash: $15,100,000, Credit to Sales $15,000,000, Credit to Charity Liability of $100,000

2) Annual Income Statement: $15 million, less expenses of $14 million = $1 million net income (using estimated expense figures here for example purposes). Nowhere on the income statement is the $100,000 round up - pure balance sheet.

3) Annual Tax Return: Company reports $1 million income (consisting of many sections of the tax return - (i.e., revenue, food costs, payroll, supplies, depreciation, etc).

4) Adjust Tax Return Income by making a donation to charity. Company writes check to said charity, gets receipt from 501c3 charity & has canceled check. Net Taxable Income is now $900,000

5) Loophole (as I see it): Company reduced net income by $100,000 by donating YOUR money. A legitimite income reduction of $100,000 would be accurate if the company matched your $100,000 with THEIR money.

6) What am I missing here? If I gave $100,000 to charity, that would be my tax deduction but in this case, I gave MY money to company so that they could get MY tax deduction.

This is why I beleive this has become a trend - any comments?

[cockerpunk]

yup, thats exactly why they do it. its astroturf.

[The Synergizer]

Nope. Logic is flawed..

In super simple analogy terms that charity liability is a "loan" to the company, hundreds or thousands of little cash loans. When the loan is repaid, by writing the charity checks, it is a credit to cash and a debit to the liability account. There is no associated income or expense.

It's also like collecting sales tax and then remitting it.

[Tidybuoy]

Originally Posted by The Synergizer

Nope. Logic is flawed..

In super simple analogy terms that charity liability is a "loan" to the company, hundreds or thousands of little cash loans. When the loan is repaid, by writing the charity checks, it is a credit to cash and a debit to the liability account. There is no associated income or expense.

It's also like collecting sales tax and then remitting it.

Agreed, as far as the accounting treatment, your comment should be my note 1.5), or as I stated in my note #2, pure balance sheet.

However, donations can be supported by receipts from the charity. Sales tax is never taken as a deduction, but donations are. Example: I donate clothes to goodwill, and I take a deduction on my taxes - it's never reported as part of my income or expense.

[The Synergizer]

That would be fraud. They could try.

Cash donations are different than valuing clothing.