Wednesday, November 15, 2006

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!

Spread goodwill.

1 comment:

Anonymous said...

Hi June, I am a practicing psychologist who faces the situation of Medicaid reimbursing only 65% of my fees. Insurance companies also variably reimburse with a net loss to me of about 35% of my total income. I am not intentionally donating my service--just trying to survive in an unfair world. Is the "adjusted" amounts reimbursed tax deductible? Thanks, DrN