July 1, 2026 – The distinction between a deductible ordinary and necessary business expense under IRC § 162 and a deductible charitable contribution under IRC § 170 has long been an important feature of federal tax law. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, adds yet another distinction. For taxable years after December 31, 2025, OBBBA sets a 1% floor (1% of taxable income) for charitable contribution deductions by corporations and a 0.5% floor (5% of contribution base) for charitable contribution deductions by individuals. Under OBBBA, corporate payments that fall below the 1% floor are not deductible as charitable contributions, and payments that fall below the 0.5% floor are not deductible as charitable contributions by individuals.
Giving business deductions a second look. These new contribution deduction floors are causing businesses that make payments to charity to consider foregoing a charitable contribution deduction, claiming a business deduction instead.
Marquis v. Commissioner Tax Court case. In the Tax Court’s precedential decision in Marquis v. Commissioner, 49 T.C. 695 (1968), the taxpayer, who owned and operated a travel agency, was seeking to deduct her recurring payments to charities as business expenses under section 162. The charities were her business clients and represented an integral part of her business.
The taxpayer’s treatment of her payments to charities as business expenses enabled her to avoid the limitations on charitable contribution deductions in section 170. The IRS challenged that treatment, arguing that for a business expense deduction, the taxpayer’s payments had to have been made in exchange for a binding obligation on the part of the charities. The court, finding that the taxpayer’s payments were made with the expectation that she would continue to obtain business from the recipients, and the payments were a substantial, continuing, integral part of her business, concluded that the payments were not contributions within the meaning of sections 162 and 170 and were not properly categorized as charitable contributions.
The court did not rule on the allowability of a business deduction for payments to charity.
Regulations finalized in 2020 take Marquis ruling one step further. Treasury Regulations § 1.162-15(a), as amended in 2020, takes the Marquis opinion a step further, stating that a payment to charity may be allowable as a business expense rather than a charitable contribution if it bears a direct relationship to the taxpayer’s trade or business and if it is made with a reasonable expectation of financial return commensurate with the amount of the payment. For example, a taxpayer’s belief that the payment will generate a significant degree of name recognition and goodwill may suffice for a business deduction.
Recommendations for business taxpayers. The decision to claim a business deduction for payments to charity requires careful consideration. In some cases, a charitable contribution deduction, even taking into account the new the OBBBA floors, may be more advantageous for businesses than a business deduction.
Businesses facing the new section 170 floors are well advised to consider whether their payments to charity meet the requirements for a business deduction. The new rules make it more important for taxpayers to evaluate the available options and understand which deduction applies best to their tax situation. Tax counsel familiar with the benefits and requirements for a business deduction and a charitable contribution deduction can help businesses evaluate their options and ensure that payments are documented in accordance with the tax law requirements. If you would like to consult with experienced tax attorneys regarding the impact of OBBBA on your business’s charitable giving and deduction planning, contact the attorneys at K. Tyson Law.
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If you are a business owner, you may need help in determining whether a payment to charity should be characterized as a business expense or a charitable contribution. Each may have a different tax benefit. If you are giving cash or property to charity and would like to consult with experienced tax attorneys who specialize in charitable giving, contact the attorneys at K. Tyson Law.
Written by Karin Gross and Esther Bosire.