No deduction for donated work or services

Dear June,

I'm doing some freelance consulting work for a nonprofit organization. The work has gone over budget and they cannot afford to pay me to finish the work. They offered to count the value of my work as a tax deductible donation. Is this Kosher and how do I handle it?

Ken, Graphic Designer in Massachusetts

Dear Ken:

You cannot claim a tax deduction for time or services donated to a charitable organization.·

If you drop ten dollars into the collection basket at church: A deduction. If you donate your worn shoes to the Helping Hands Youth Shelter: A deduction.· If you give 40 hours of your time "valued at $100 per hour" to the AIDS Walk, designing the advertising and promotional material: No deduction.

Only money or goods given to a recognized charity will result in a deductible charitable contribution. There's no way that the non-profit can credit you with a donation.You may think that's unfair. Whether you're justified to think that or not, here's how the IRS looks at it. If you give $10 to a charity, someone -- you or someone else -- earned the money before it was donated. If you purchased a $100 pair of shoes, somebody earned the money to buy the shoes. If you could have sold those old shoes at a thrift shop for $5 but instead donated them to a charity, you are entitled to a $5 charitable deduction on your tax return. But, you can't give away something you never had. And if you don't receive a fee, well then you never had the paid fee to give away.

Some non-profit organizations encourage people to donate services, assuring them that it is a tax-deductible donation. But services -- another word for your time — are not a deductible as a charitable contribution. Out-of-pocket expenses that you incur — such as supplies, telephone, transportation costs -- can be deducted.

I encourage you to give as much time and service to charity as you can. Doing so does create benefits but not in the form of a tax reduction.

By the way, self-employed people who file Federal Schedule C cannot take business-related charitable contributions as a business expense. For sole proprietors these are personal deductions and are deducted on Schedule A.

More info about donating products, services or your time in these posts -- expenses -- donated services or products.

And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .

Spread goodwill.
June

How does a self-employed pay himself?

Hi June,

Just started a new business – irrigation installation. When you own your own business is it more beneficial to pay yourself a salary or are you able to write yourself checks as needed for living expenses from the profits?

Shawn in Oklahoma


Dear Shawn,

You, like many self-employed, use the wrong term when referring to money you want to take out of your business. The only people who can earn a salary are employees. You’re a new business and you didn't say that you are incorporated so then you must be a sole proprietorship. And you can’t be an employee of your own sole proprietorship.

You are your business. Your business is you. You bring in money from clients. You pay out expenses. What’s left is profit. Profit is what you’ll pay tax on and profit is your “income.” How you take money out of your business, or when you take it, or how much you take has no effect on your profit. If the money is there you can take it out whenever you want.

Here’s an example: In one month a client pays you $5,000. You purchase $5,000 worth of supplies on a credit card. Your profit for the month is zero. That’s $5,000 income minus $5,000 expense. But you still have $5,000 in your pocket because you took none of it out of your pocket for supplies – you put it all on credit card and haven’t paid the credit card company yet. You can take that $5,000 and go on vacation to Tahiti. Not a good idea but you could do it!

And, as always, read the book that can simplify your tax and financial life, AND save you money! SELF-EMPLOYED TAX SOLUTIONS .

Best,
June