It’s the season of giving.
In Financial planning, there is a concept known as the chronological financial lifecycle. It starts with the accumulation phase, where the individual has low earning power and is prone to take on loans to acquire assets like a car or house. Then we have the consolidation stage where income has improved. As he gets older, the individual starts to transit to more conservative assets like bonds. The final phase is known as the gifting and spending stage, where the individual is in the process of estate planning and setting up Trust and Endowments. Giving is an essential part of a financial plan; its primary objective is the orderly transfer and gifting of assets without loss due to dissipation.
Figure 1: Financial Lifecycle
Is there a right way to give?
Yes, legally, there is a right way to ensure that you properly account for all donations and bear no future tax obligations. As individuals earn more, their higher-income will attract a higher tax liability. Giving to charities through donations is a legal way to reduce taxable income and thus the amount of taxes paid.
Section 25 of the Companies Income Tax Act (CITA) states that donations made by companies to designated funds, bodies, or institutions in Nigeria are tax-deductible. Paragraph 35 provides that donations to any public fund established or approved by the Federal or State Government in aid or relief for any natural disaster will be tax-deductible.
Are there tax-exempt organizations in Nigeria?
Yes, Nigerian laws designate specific entities’ income exempt from Company Income Tax. This means you can also structure your giving under these entities and take advantage of the tax laws.
- Cooperative societies are registered under ecclesiastical, charitable, or education establishments of a public character. If you set up “Old Boys Association of Johns College and that association owns and operates John’s restaurant, the profits of which are earmarked to fund scholarships to Johns college, then the profits generated by John’s Restaurant are tax exempt. Statutory or registered friendly societies, same principles under the cooperatives
- Profits of a registered Trade Union are also exempted from taxes. Imagine a trade union publishing a weekly paid newsletter or website on prices and market data. If that information is sold to the general public for a fee, and the trade union makes a profit, the profits are tax exempt.
Do all donations qualify as deductible?
For a donation to qualify as a deductible donation, it must pass these tests:
- The public fund, statutory body/Institution, ecclesiastical, charitable, educational, or scientific institution receiving the donation must be established/incorporated in Nigeria and specified in the Fifth Schedule of the CITA. Thus, do your due diligence and ensure the body receiving that donation is qualified to receive such if you are giving.
- The donations must be made out of profits and not a capital expenditure. This means the company can only donate from Gross Profit, and donations cannot be an expense line item.
- The donations cannot exceed 10% of the total profits of that company for the year of assessment in which the donation was made.
- Donations to tertiary institutions can be made in revenues or capital as long as they do not exceed 15% of total profits or 25% of tax payable in the donation year, whichever is higher. This means you can construct a laboratory or hostel for students in a school and donate that capital sum.
- Donations made by a company should not include any payments made by the company for valuable consideration
Are donations individuals by tax exempt?
Nigerian tax laws do not offer tax deductions on donations made to NonGovermantal Agencies (NGOs) by individuals
How should I give?
It is essential to give with a good heart. Giving to causes such as education, the environment, poverty alleviation, or any other good cause improves the quality of life for everyone.
However, here are a few rules to follow:
- Give from an incorporated entity to get the most benefits from tax breaks. It is essential to give from an entity that can claim a tax deduction. So while accumulating, start a cooperative or charitable organization and make donations to that entity during your working life. Imagine 10% annually. Alternatively, you can create a business with friends to give the proceeds to charity. Incorporate early, accumulate early, build a track record of supporting charitable causes.
- Incorporate CSR giving into the fabric of your organization. Companies that embrace good CSR practices get rewarded by the marketplace. Their brands are seen as more responsible and tuned to today’s concerns. A study by Greenprint in her Business of Sustainability Index found that two-thirds of Americans are willing to pay more for sustainable products.
- Keep records. It is easy to track cash and capital goods donations, but donating time is also an expense. Thus keep track of management time taken or used in pro bono activities. The organization can convert this time to a cash donation as well.
- Also, it is essential to track the disbursement and use of donations by requesting reports of the impact your contributions are having.
- Tell others the good work you are doing. Don’t brag, but do not be shy in advertising good works and donations. That publicity you give to the charities is worth a lot to them. They also expose those charitable organizations to a broader audience.
- Get your employees involved. Employee giving may not be tax-exempt in Nigeria. Still, your organization can offer to match gifs and donations made by employees to registered causes.
In closing, giving must be thoughtful, organic, and show empathy. The cost of the PR to talk about the gift should not be more than the gift itself.
We all need each other.