How to Deduct the Value of Services Rendered to a Non-Profit Organization
The majority of non-profit organizations survive by receiving tax deductible cash and property donations. Many non-profits also survive by having professionals “donate” their time and/or services. However, this type of donation, while benefiting the non-profit, is not tax deductible by the individual or business.
Internal Revenue Service guidelines strictly prohibit deducting the value of services rendered. Why is this? Because while everyone’s time is valuable, there is no standard in determining what that time is worth.
The workaround would be to invoice the non-profit for your services. The non-profit pays your invoice and you immediately countersign the check and return to the non-profit as a donation. Further proof of the donation is a letter from the non-profit thanking you for your donation.
For example, Non-Profit wants Joe Accountant to prepare its annual taxes, but has no money to pay for such services. Joe Accountant agrees to prepare such taxes, but will invoice for the service. Non-Profit agrees to pay the invoice, but expects Joe Accountant to countersign the check as a donation (remember the scene from Ghost). Joe Accountant receives a letter of donation from Non-Profit. Non-Profit deposits countersigned check into its bank account. The effect: The bank will credit the deposit first and clear the same check as a debit.
Non-Profit paid for services rendered; Joe Accountant received payment for services rendered. Joe Accountant has a verifiable donation letter; Non-Profit has a cash donation. This creates an audit-proof paper trail.
Joseph M. Tames has been a Certified QuickBooks ProAdvisor since 1999. Joe travels throughout the United States installing, setting up, training, and troubleshooting QuickBooks software and solving accounting and tax-related issues. In his spare time, Joe attempts to solve the photographic properties of exposure and composition. You can reach Joe by phone at 866-293-5974 or by email at josephtames@gmail.com.
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!
Brilliant Tip! Counter signing an invoiced check payment right back to the non-profit leaves a valuable paper trail. You got an Invoice, a Check and also an offical Bank statement. Banks always process Credits before Debits so the loop will work fluently.
Terrible Tip!!!!
Yes, you did get a donation, but you got a taxable income, too. If JoeAccountant invoices for $1,000, he now has income of $1,000. Take a deduction of $1,000 and he has a net income of $0 - NOT a net deduction of $1,000 - He’s in the same position as if he just donated the services.
If this is the type of advice you hand out, don’t sign me up as a client.
Could the deduction actually be taken as a cost of doing business to offset the income? If not, then Chris’s comment has some legitimate concerns. If so, then it is a great opportunity. I would assume that as long as this was not paid out as personal income that it should hold water but do not have the experience to substantiate the recommendation.
Lets keep our eye on the ball. The question was how to deduction the value of donated services.
If you want to donate your time to a non-profit without thinking how to deduct this time against your taxes, then donate your time.
If you want to deduct such time against your taxes, then this is the only way.
And Chris, “Terrible Tip” is little strong for an apples and oranges comparison. Yes, the invoice is added to your income. However, the deduction does not reduce your business income; it reduces adjusted gross income in the form of an itemized deduction. Provided, of course, you are able to itemize in the first place.
MFJ filers need to have medical, tax, interest, charity, and unreimbursed job expenses exceed over $10,000 just to use Schedule A.
LLCs and S-Corps don’t deduct the donation against business income either. The donation flows to Schedule K as a pass-through item to the members/shareholders in their distributive percentages.
Only C-Corps can deduct donations against business income, and only up to 10% of net income.
Remember, the primary benefit is to gain something from something you were never going to get…a tax deduction. The second benefit to you is to increase your income to the point of not being subject to the IRS hobby-loss rules. Basically, this means you have three years to show a profit on your business; otherwise all business-related deductions are limited to business income. Translation: No business loss deduction against your personal taxes. That includes your cost of thousands of dollars in equipment.
It’s a game people. Know the rules and apply them to your specific situation. That means knowing how all federal, state, county, and city business and tax laws apply to you.
WOW - interesting - thanks!