When you think of philanthropy, you might picture billionaires on stage handing over oversized checks. Think of Warren Buffett pledging his fortune to the Gates Foundation or Oprah Winfrey creating schools in Africa. While the headlines make it look like pure generosity, here’s the truth: philanthropy is also one of the most powerful tax strategies available.
The wealthy aren’t just giving out of the kindness of their hearts — though many do have genuine causes they care about. They’re also using the Internal Revenue Code as a roadmap to reduce taxes, build legacy, and keep more of their wealth compounding for the long term.
The best part? You don’t have to be a billionaire to benefit. Small and medium-sized business owners can use philanthropy just as effectively — if not more — because the impact on your tax bill is immediate and measurable.
Let’s break down how philanthropy works as a tax strategy, what’s allowed (and what’s not), and how to design a plan that benefits both your community and your bottom line.
Giving Inside the Code: How Deductions Work
The IRS doesn’t just allow charitable giving — it encourages it. Donations to qualified organizations can reduce your taxable income, sometimes substantially. The rules vary depending on what you give.
Cash contributions are typically deductible up to 60% of your adjusted gross income. If you donate appreciated property — like stocks or real estate — the deduction is generally limited to 30% of your AGI. The reason wealthy people love donating stock is simple: they avoid paying capital gains tax while also getting a charitable deduction for the fair market value of the property. That’s a double win.
Let’s say you bought stock for $10,000 a decade ago, and it’s now worth $100,000. If you sell, you owe capital gains tax on the $90,000 profit. But if you donate the stock to a qualified charity, you get a $100,000 deduction and you never pay tax on the gain. This is why sophisticated taxpayers lean on appreciated assets rather than cash when structuring their philanthropy.
Setting Up Your Own Charity
For some, writing checks to existing organizations isn’t enough. They want control over how their money is used, or they see an opportunity to build something bigger than themselves. That’s where creating your own charitable entity comes in.
The most common structure for business owners is a private foundation. A foundation allows you to contribute money or assets, take an immediate tax deduction, and then decide how to distribute those funds over time. There are strings attached — like annual distribution requirements and strict IRS reporting rules — but the flexibility and control can be worth it.
Another increasingly popular option is the donor-advised fund (DAF). Think of it as a “charity checking account.” You put money in, take the deduction right away, and then recommend grants to your favorite charities over time. It’s simpler than a foundation and avoids some of the heavy compliance burden.
Either way, having your own vehicle for giving creates legacy and allows you to involve your family in something meaningful — which brings us to the next point.
Bringing Family into the Fold
Philanthropy isn’t just about taxes; it’s also about values. Many entrepreneurs use their charitable organizations as a way to teach children about stewardship and responsibility.
Yes, you can hire family members to work in your foundation or donor-advised fund, provided they perform legitimate work and are paid reasonable salaries. Think of tasks like managing investments, evaluating grant opportunities, handling operations, or even marketing the mission.
This strategy does two things. First, it shifts money from taxable income to deductible expenses while keeping funds inside the family unit. Second, it creates a training ground for the next generation — preparing them to manage wealth responsibly while reinforcing the importance of giving back.
What Can Be Donated — and Why It Matters
When most people think about donations, they think about cash. But savvy taxpayers know the real leverage comes from donating assets. Stocks, real estate, cryptocurrency, artwork, even closely-held business interests — these can all be transferred to charity if structured correctly.
Donating real estate, for example, can unlock powerful benefits. Imagine you own a property that’s doubled in value. Instead of selling and paying capital gains tax, you donate it to your foundation. You avoid the gain, claim a deduction for fair market value, and your foundation can either keep the property or sell it tax-free to fund its programs.
Business owners also use “split-interest” strategies like charitable remainder trusts. With this approach, you donate an asset into a trust, get a current tax deduction, and still receive income for life. When you pass away, the remainder goes to charity. It’s philanthropy blended with retirement planning — a way to have your cake and eat it too.
The Pros and Cons of Philanthropy as a Strategy
Like every tool in the tax code, philanthropy has its strengths and weaknesses. The benefits are obvious: reduced tax liability, avoidance of capital gains, legacy-building, and family engagement. But there are limits.
Deductions can only offset a percentage of your income, not all of it. Compliance is strict, especially for private foundations, and the IRS keeps a close eye on self-dealing and excessive compensation. The strategy also requires liquidity — you must be in a position to give in order to claim the benefits.
That said, for the right business owner, philanthropy can be one of the most rewarding strategies. It combines financial efficiency with social impact — a rare win-win in tax planning.
Real-Life Example: The Entrepreneur’s Foundation
Let’s bring this down to earth. Imagine a business owner in Florida with $1 million in taxable income. Without planning, they’re staring at a hefty tax bill. Instead, they decide to contribute $300,000 of highly appreciated stock into a private foundation.
They avoid capital gains on the stock’s growth, immediately reduce their taxable income, and now have a pool of funds they can direct toward causes that matter to them. They put their daughter in charge of grant evaluation and their son on investment oversight — paying each a reasonable salary. Suddenly, philanthropy isn’t just a tax deduction. It’s a family mission that will outlast them.
Final Thoughts
Philanthropy isn’t just charity — it’s strategy. The wealthy know this. They’ve been using the tax code to reduce liability, build legacy, and transfer values for decades. But this strategy isn’t reserved for billionaires with press teams. Small and medium-sized business owners can benefit just as much, if not more, by using philanthropy to cut taxes while creating something meaningful.
The question isn’t whether philanthropy works as a tax tool. The question is whether you’re ready to put it to work for your business and your family.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
