I am a designer and this year I have done some free/steeply discounted work for charities. Can I deduct the difference between my regular fees and what I actually charged? On the one hand, I figure Uncle Sam is not about to give you a break for money you could have made; on the other, I could just charge them $500 and donate it back to them and get around it that way, so maybe they’ll let you deduct it if you could work around it that easily.
Deducting travel and expenses doesn’t really help me, since I don’t need to travel to do the work and I already deduct the materials I need for work.
I do discounted work (veterinary) for several shelters and my accountant has us keep track of the difference between full cost and what I charge them. I believe we deduct the difference somehow (I never actually look over the tax papers, just sign them).
OTOH for rabies clinics I usualy take the money, deduct for the cost of equipment, then hand the sponsors the difference as a donation.
I don’t think you can deduct the difference. I know for sure that you cannot do FREE work for a charity and deduct the value of your work, so I don’t see why you should be able to deduct the difference between what you charge them and what you charge for-profit clients.
I think the only way to get around it is to charge the full amount and then donate X amount to the charity.
vetbridge, I would imagine that your accountant is having you keep track so that when he deducts your business expenses - not your charitable donations - he knows what to deduct. Or, if you pay (your wholesale cost) $20 for a shot and you only charge the spay clinic $10 for that shot, you can deduct the difference as a charitable donation - but that is something completely different from deducting the hourly value of your work.
FYI, the mileage deductiion for charity work and the one for business expenses are different. Business travel is somewhere around $0.32 per mile (it changes every year; not sure what it is for 2005). Charity mileage is about $0.14 per mile. Check with the IRS to see what the allowance is for this year.
Regarding charging market rates and then donating it to the charity: I would have to do the accounting on it, but I bet this doesn’t make much sense financially: if you charge $5,000 for your work, you have to report $5,000 as income - plus pay taxes on it (worse if you’re self-employed). Then you turn around and donate $5,000 but I have a feeling the charitable deduction doesn’t equal the cost of all the taxes you had to pay on that money when you declared it as income. Otherwise people would be making those kinds of donations right and left.
Donated services are not deductible. See Federal Tax Regulation Section 1.170A-1(g).
Let’s take a short example. You perform a free service for your church. Normally, you would charge $500. You charge them nothing. You have no income. You have no tax liability for the work. You owe the government nothing. It owes you nothing. On the other hand, suppose you charged the church the $500 but then donated the cash. You would have $500 of taxable gross income but would also have a $500 charitable deduction. The net increase in your taxable income is zero. In both cases, you have a net change of zero. You come out the same.
If you were to take the second path and charge the church for your services and then deduct the cash contributions, you would have a higher gross income (but taxable income would not change). Because of this, you may lose some benefits from various phase-outs. You might lose benefits from: earned income tax credit, student loan interest, IRA deductions, Roth IRA eligibility, ability to itemize some deduction etc.
As something I must share - when looking at the chartable donation rules, I learned you cannot deduct amounts donated to communist controlled organizations. Wonder if that ever comes up on audit.
I always thought celebrities got a write-off for charity appearances and making public announcements. Also there is the story about Abbot and Costello going bankrupt because their accountant didn’t deduct for their troop shows, while Bob Hope’s (and others) did. Is this just an urban legend?
Errr…don’t want to suggest that anything wrong is going on, but maybe it is. There is basically a big pile of cash that is changing hands. Beyond that I am pretty ignorant as to the facts and should probably take the 5th.
IIRC, there was an infomercial back in the late 1980s which made a point of saying that if you did charitable work, you could send the organization a bill, then turn around and donate the money they paid to you to that same organization so you could claim a tax credit, but because so many people saw the informercial and started doing that, the IRS changed the tax code, so you could no longer do that. I could be wrong on the tax code change.
I do know that if you donate to a charity and want to claim it on your taxes, you must get a recipt, because your cancelled check is no longer considered good enough, since people were writing checks for one amount to a charity, and then getting part of the money back, but deducting the full amount of the check on their taxes.