Gifting Royalties: What To Consider Before Donating

  in Tools & Tips

Nov 09, 2020

Many artists like to contribute to causes they care about using their royalties as a source of financial assistance. 

Artists such as Jeff Tweedy, Jason Mraz, Hozier, and Idris Elba are among dozens who have donated royalty proceeds in support of issues important to them. 

But a careful consideration of exactly how to donate royalties is an important step artists should take. Doing so helps ensure their gift remains not only a meaningful benefit to the organization, but also benefits their bottom line. 

Here’s a real-life example... Tony Geiss was a songwriter famous for penning several famous theme songs for children’s shows, such as Sesame Street’s “Elmo’s World.” He passed away in 2011, and willed all his royalties to 10 different organizations.

In the years that followed, this gift turned into a processing burden for the organizations that paid his royalties. It also created accounting problems for the 10 organizations collecting and processing those payments. You can read more about that situation here

Now we’re not a tax or financial advisors, nor lawyers, so none of this should be taken as tax, legal, or financial advice. But the Geiss example helps identify some questions that any artist interested in donating royalties should ask. 

The first is whether to make the donation in cash, or as a gift of the royalty itself. 

Cash Donations

In many cases, donating royalties means just earmarking any earnings from a song/album to forward to the organization selected. It’s like a cash donation that changes quarter to quarter based on the amount collected. 

The upside to this method is the simplicity involved. The artist just calculates what portion of royalty income stems from the album/song “donated” and writes a check. 

But there are downsides. First, it’s nearly impossible to demonstrate that the royalties are actually being donated in their full amount. Announcing the intention to donate royalties is a lot easier than proving those donations are actually occurring. 

Second, are the tax implications. The royalties earned are taxed as ordinary income. And while the cash donated is tax deductible, there are limitations. The IRS limits the percent deducted in a given year based on the individual’s Adjusted Gross Income and the tax-exempt status of the organization.

Gifting Royalties

Another option is to actually gift the royalty itself by adding the organization as the owner (or partial owner) of a royalty stream. In this scenario, the royalty distributor would pay the benefitting organization directly. 

This would remove the collection of that royalty stream from an artist’s taxable income going forward. But it most likely only counts as a taxable deduction in the year the gift was made. Determining the value of that gift for tax deduction purposes can get complicated. 

Donating royalty ownership requires an appraisal of the royalty’s value from a “qualified appraiser.” It’s up to the artist to provide this appraisal (both for their own tax deduction purposes as well as for the organization receiving it). It involves filing a special IRS form with that year’s tax return. It also means filling out a range of special paperwork and forms with the royalty paying organization as well (label, PRO, publisher). 

This can get complicated fast. It would likely require the help of a lawyer and a tax advisor at the very least, not to mention an accountant or financial advisor. 

Which Royalties? 

Whether it’s a cash donation or a gift of royalties, it’s important to identify exactly which royalties are being donated. As most in the music business knows, there are multiple types of royalties that a song can collect. This includes sales/streaming sound recording royalties, as well as different types of royalties due to the songwriter depending on how the song is used—played on the radio (performance royalties), streamed on Spotify (performance and mechanical), or licensed for a movie (synchronization royalties). 

Different organizations collect and distribute these royalties on different timeframes. Gifting different royalty payments collected at different times of year and in differing amounts could cause an administrative headache.

Strategic Considerations

Finally, it’s worth considering how this donation will affect the organization meant to benefit.

Strange as it might sound, a recurring donation on a monthly or quarterly basis might not be as helpful as a one-time lump payment. 

There are certainly benefits to recurring donations. Over the long-term, a smaller amount donated regularly for an extended period of time will ultimately direct more money to the organization and create a predictable source of income. 

As a “sustaining” donation strategy, that’s fine. But when there’s an immediate need, or unique opportunity to act, charities can put to use a larger lump sum far more effectively. Even if that lump sum is less than that collected over five years, the immediacy of it carries added value. 

When the pandemic caused the cancelation of all live shows, there was an immediate need to provide touring artists with relief. Donating royalties quarterly to an organization in a position to help might not be the best solution. It would take years to accumulate the totals needed to provide relief when the demand for it is immediate. 

Donating a lump sum at the time of greatest opportunity could allow such organizations to “strike while the iron’s hot.” 

Other considerations concerning recurring donations are more logistical. For starters, it’s likely that the amount collected in royalties will decrease over time. But more importantly is the accounting question. 

Processing donations can be time-consuming for nonprofits, particularly smaller ones. Handling checks takes time (and potentially money if they have to hire people to manage it). Checks sent in small amounts may not be worth it for them. In fact, some charities actually have specific instructions and rules for how much money they prefer to receive via check. 

Fortunately, the same solution found for the Tony Geiss Sesame Street royalties can solve many of the downsides in the scenarios we’ve listed. The Geiss estate decided to simply sell Tony’s royalties to collect years worth of payments at once. It then donated the entire amount to the 10 different organizations identified in one lump sum. 

Artists who choose this route can donate years worth of royalty payments at one time. The result is an immediate and meaningful contribution to a cause in a way that’s easier to account for by both the donating artist and the benefitting organization.

Other benefits of selling royalties and donating the proceeds include: 

  • Determines the value of the royalty at the point of sale without the need for a costly appraiser.

  • Creates a trail of proof that the donation occurred.

  • Provides a larger, immediately actionable gift to the cause.

  • Puts less burden on accounting/processing for the organization, royalty distributor, and artist.

  • Has potential tax advantages. Many royalty sales are taxed as capital gains, which carries a lower tax rate than ordinary income. 

Clearly, there is more than one way to make a donation to a cause. The “right” solution depends very much on the motivation, the organization, and the royalty situation. 

If you’re considering making a donation to a cause important to you using your royalties, contact our artist relations team to get a free valuation of your catalog and options for making the most of your gift.