Be generous but do not cheat yourself!

In my September Ways Through the Maze I presented info on indies donating their time, services or products. You can read it here.

Today I received the following questions on that the topic.

Hazel, of Organized for Life, asks:
Someone I know "donates" services by arranging that the organization will pay her and that she will return the payment to them in the form of a donation.

Is that smart, or is it just cheating?


Beth, of Pilotone Music, asks:
Occasionally I have performed a service for a non-prof, been paid for it, then donated the check back to the organization. Isn't that a write-off or deduction?


Nancy, of Graphic Interpretations, asks:
Could this nonprofit have been confused with the state Enterprise Zone status? The State of Colorado offers this to nonprofits who apply and qualify. People who donate money and those, like myself who donate graphic design services, file paper work and may take a 25% deduction off the state income tax. I have done this for two nonprofit clients. In one instance, I did $2,000 worth of work and received a $500 tax credit off the bottom line for state income taxes.


Let me answer Nancy first.
A deduction is a subtraction from income.
A tax credit reduces your taxes.

For instance, a $1,000 business expense deduction might save you about $330 in taxes. While a $1,000 tax credit reduces your tax by $1,000.

A business expense deduction – something like supplies or postage -- is not at all like a state tax credit. Nor is it like a federal tax credit.

For instance, you can get a federal tax credit for spending money on child care but you cannot deduct childcare as a business expense. You can get a tax credit for being elderly or disabled but you can’t subtract old-age as a business expense.

Just as the fed has tax credits so does every one of the 50 states. And no state necessarily offers what any other state offers.

A self-employed may not deduct any amount of money from her business income for time or services donated to a non-profit. States may offer incentives to donate. That's a separate issue. Good for Colorado!!



My answer to Hazel is: Yes, it’s cheating. You are cheating yourself. Here’s why. And, this applies to Beth as well.

If you donate $2,000 worth of services and the non-profit pays you $2,000 you will pay federal income tax and self-employment tax on that income. Depending on the state you may also have to pay state income tax, sales tax, gross receipts tax, or unincorporated business tax.

Were you to then deduct that $2,000 as a personal charitable deduction on your federal tax return you might be able to save on federal income tax. I say "might" because you may not have met the threshold for personal deductions and so you'd lose the benefit of the deduction.

Since it is not a business expense you would not reduce your self-employment tax, approximately 15%. That’s a cost to you of $300. [2000 x .15]

Depending on your state there is a good chance you would get no personal deduction for your personal contribution and had you been liable for sales tax, gross receipts tax, or unincorporated business tax absolutely no deduction there. So the tax you paid would stay in the hands of the various state agencies.

All in all, by claiming the $2,000 as business income and then using it as a personal deduction you would have cost yourself a considerable amount in taxes.

Help out everybody: Please forward this post to the non-profits.

-- June Walker