A long-winded title I know. I am starting a business and two areas I want to target are small businesses and non-profit. I am considering discounting the pricing for my services depending on the circumstances so for example $5000 worth of service for only $3000. What are the tax implications of this? It seems obvious that I made $3000 and that’s the end of it BUT doesn’t the IRS look at cases where someone gets something for less than fair market value as income - like if someone rents me an apartment for $500 even though the rent should be around $1500? Looking at it that way, I gave them $2000.
Am I making this too complicated? If I give my service for free to a non-profit, isn’t that like a donation of time and services that I could cost out? Is there a difference between giving a discount to a for-profit business and a non-profit?
I’m not sure why the tax implications of your pricing structure to your clients are your problem. AIUI, the IRS generally only looks below-market transactions of this kind when they are not at arms’ length; that is, when you sell your daughter your house for a dollar, or when employers compensate employees with free product.
The IRS doesn’t really care if you are selling something for a fair value, they are more concerned whether you are pretending that selling it adds a bunch of expenses. This is most often encountered where someone rents a place to a family member for a nominal amount, and then claims thousands of dollars in repairs, improvements, and other expenses. But they don’t care if you are getting a steal or getting ripped off. If you want to sell widgets for cost you can. If you claim that you can’t sell those widgets without spending thousands entertaining clients in Hawaii and try to deduct those, then eyebrows are raised.
You can claim certain expenses for charity work, e.g. mileage (and at a much lower rate than business mileage), but that does not include the expense of your time, no matter how valuable you think it is.
The main thing to know regarding your question is that the services you provide to someone does not have a “fair market value” like a product would. Just because you normally charge out your services at a certain rate does not mean anything in regards to taxes. For cash-basis taxpayers (all individuals and most small businesses) the amount you actually collect for services you provide in a given year is the amount that would be reported in Gross sales on your tax return. For accrual-basis taxpayers, the amount that you bill out in a given year (Accounts Receivable) would be reported in Gross Sales. So just because you give certain clients a discount is basically meaningless for taxes.
You also cannot get a charitable donation deduction for donation of services to a non-profit. You are NEVER allowed a deduction for providing services free of charge - to a non-profit or anyone else. Only donations of cash or property can be deducted as a charitable contribution. You can also get a deduction for out of pocket costs incurred while performing the services or mileage incurred while doing work for the charity (at the charitable mileage rate - not the business mileage rate).