I'm reviewing payments to charities for a company and trying to determine what payments are sponsorships and which ones are charitable contributions. How should these two types of expenses be treated differently when recording the transactions and what are the tax affects of recording an expense as a charitable contribution vs a sponsorship?

Can you define exactly what you mean by a sponsorship and how it differs from a charitable contribution?

They are both expenses to the company and should be recorded in essentially the same way only difference is what GL exp account you should hit.

The tax effects are the only thing that would differ. But I need to know more info. What type of business is it? If it is a sole proprietorship or partnership (or any other form of Business that flows directly to the owners tax return - S Corp) then the charitable contributions deductions are capped at 50% of AGI. Again need more info because many other factors are involved here.

The sponsorships would be donations to local groups such as girls baseball team or local breast cancer walk event. For these sponsorships we may receive mention in a local publication or sometimes there will be a sign with our name on it at the event.

In a sponsorship you can write it off in full as a business expense because essentially is it like a marketing or advertising expense. The test in my mind would be are you expecting to get something from it (more sales, increased customer awareness etc) then it can be accounted for as a sponsorship. But remember you should be able to justify why you think you are getting something out of this and why it helps the company. Sponsorships are usually highly public it's really more about creating goodwill for the company then helping the organization in question.

A charitable contribution is basically giving the money away to be a good “corporate citizen”. You are expecting little or nothing in return for your donation. Also, charitable contributions are more infrequent and often one time events. The tax effects here are dependent on what form of business we are talking about here. In any business that flows directly to the owner's income tax return the company cannot write this off to expense. It is essentially a contribution by the owner himself and he can deduct it on the 1040 - Schedule A (again s/t 50% of AGI cap). It's not a business expense in this case.

If the company is a “C” corp. they can expense it on there corporate tax return and it is s/t a 75% of Net Income limitation. But I would have your tax accountant verify this. As far as GAAP it makes no difference, it is an expense. The only difference is on the tax side.

Check out these sites or do some more googling yourself.

Tax Tips for Charitable Contributions | Company Activities & Management > Business Ethics & Corporate Citizenship from AllBusiness.com

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