Ask the taxgirl: Valuing Your Services for Charity

Taxpayer asks:

Hi, I read your blog entry that explains that service time donated to a charity is not deductible. What if there is an actual assignable value of the service time to the charity? For example, I am donating my services as an auction item for a charity auction; if somebody buys it for $600 from the charity, then I perform the service for the purchaser; can I deduct that $600 value as a donation to the charity? Or, if the IRS sees no “value” in the service being donated and sold, does the buyer of the auction item get the full $600 deduction as a cash donation to the charity? Thanks in advance

Taxgirl says:

Nope, it doesn’t make a difference if you can value your services or not – the donation of personal services is never deductible as a charitable donation. I can value my services pretty easily since, in many instances, I charge by the hour as an attorney. But it doesn’t matter: the IRS will not allow you to assign a value to your time for the purposes of a donation.

The second part of your question feels like it should be related but the IRS doesn’t consider the two pieces together at all. It’s clear that the value of your services isn’t deductible as a donation. However, on the buyer’s side, a charitable donation is deductible only to the extent that the donation exceeds the value of any goods or services received in exchange. So when you donate to public television and get a tote bag in return? You can deduct the cost of your donation less the value of the tote bag. The same analysis applies to services. If you bid at auction for, say, $1000 and you “win” a personal training session worth $150, the value of your deduction is the price paid for the item ($1000) less the actual value of the item ($150) – in this case, $850. Most charitable organizations will do the math for you and document the value of your donation on their thank you letter.

But if you’re that personal trainer? You can’t deduct the $150. You can only deduct related out of pocket expenses.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!Now on Facebook at http://www.facebook.com/taxgirl

Comments

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  2. Edward Adamsky

    What if the personal trainer donated a “coupon” worth one training session (“Value $150″) to the charity for their auction. Can’t the trainer deduct the value of that coupon that she gave to the charity? She is not giving her services to the charity, she is giving something of value that they can sell at their auction.

  3. Carol A. Fritz

    Somehow this brings to mind the unsettling thought that, being self-employed, the IRS values my business asset as zero.

  4. Carlalala

    edward,,,that sounds like a loophole!….but…the IRS could argue the “paper it is written” on is not worth 150.00…it is what is represents (mush like a bond or stock or dollar bill); …and then you are back to the actual service not being deductible..
    Maybe this is a better loophole: The personal trainer sells a $150.00 coupon to a fung shu artist at the same event…and the fung shu artist sells a $150.00 coupon to the personal trainer. They they donate their respective purchased coupons to the event! Other that having to report the $150.00 as income…can’t they (technically) now take a charitable deduction?
    Of course….doesn’t that also totally miss the meaning of true charity?

  5. Kelly

    Carlala, that wouldn’t work since if the folks “sold” their coupons to each other, they would recognize income on the sale. It would be a wash from a tax perspective.

    Edward, I think that what you’re aiming at is clever but I still don’t think it works. Just because you’re placing a value on it with a piece of paper doesn’t change the nature of the donation. The IRS has a couple of cases where they distinguish between property and services; this would still be services.

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  7. Carlalala

    kelly…yes, the wash makes it a mute point…good observation.
    What is your opinion on this scenario. A client is an actress and is hired/paid for her performance in a passion play by a church. Of the actress’s own accord she decides to sign her paycheck back over to the church. The church did not solicit her services for donation nor expect that she decline payment~~~and she was the only actor to do so; the church writes her a thank you note for her $500.00 contribution. Can she claim it?

  8. Edward Adamsky

    This issue is something that has bothered me for years. Why would any lawyer do pro-bono work, when the federal government clearly states it has no value whatsoever? I guess we have to determine for ourselves that the government is wrong and that our services are very valuable to those we help. We can only hope that the government will realize the error of its ways and someday come to an understanding of the value of charitable services.
    This is another example of a law that is contrary to logic and thus brings disrespect on the law. With too many of these, the law loses all respect and we may live in anarchy.

  9. Carlalala

    I understand where you are coming from, Mr. Adamsky and it has been statistically proven that people will volunteer/give more when the government offers positive tax benefit reinforcement. However, at the risk of sounding too altruistic; charity in and of itself is a gift not a transaction. If an attorney won’t do pro bono work because he can not garner positive reinforcement in the form of a government tax break then it isn’t too charitable of him, is it? Some professionals see their donation of time as a trade-off for networking/advertising that in turn benefits their profession and that could be perceived as an ulterior motive sidestepping the charitable aspect as well. Then, there are those who would give their time anonymously & freely no matter what…. And this is where I am torn: should it really matter what the motive of the professional is if good comes from it? Ultimately: No…so that is why I understand your perspective entirely and believe there should be some form of tax incentive for the donation of time …(but, oh how to determine it if not a straight hourly rate ?!…and, imagine the Forms & Schedules to follow!)
    This is what I think is unfair…and I’d be interested in your opinion.v It is the taxpayer who has many legit charitable deductions but takes the Standard Deduction and therefore gets NO tax benefit whereas, his neighbor who gives the same and Itemizes (Schedule A) gets full benefit! I think charitable donations should be adjustments much like IRA/HSA/other certain expenses where EVERYONE can enjoy the government incentive of giving.

  10. ThomasT

    The futility of Carlalala’s first suggestion demonstrates exactly why volunteer labor is not deductible: it has no value under tax law until it has been paid for.

    To put it a different way: say I want to get a tax break for the work I give installing a nonprofit’s network. I charge them $100/hour, and buy $200 in materials which I donate. I get a check for 10 hrs of work for $1000, and then write them a check for $1000. I recognize the income on my return, as well as the donation of both the time and the donated materials. What tax benefit have I achieved by volunteering my time? None. In-kind donations are deductible because the donor (or the donor’s ancestor or some other person) at one time paid money for the item. The slightly unfair part it that even if it has accumulated additional value since the time of purchase, you get to deduct that, too. But only slightly, because if you hadn’t donated it, at some point you’d have to pay tax on those gains.

    This issue is especially hot in the arts community, in which I work. An artist can’t deduct anything except the value of materials if they donate an artwork to a charity. However, if a collector acquires the painting and it then appreciates in value, then they can deduct the FMV if they donate the work. Why is the artwork less valuable when the artist donates it than when the collector does? Because what is the difference between the artist who applies her creativity, time and expertise to a canvas and oil paints and me who applies my creativity, time and expertise to some cables and a router? When you contribute your intellect and time, you’re a volunteer, and that’s not deductible, no matter the FMV of your intellect and time.

  11. Marine B.

    I was searching for this particular answer. I find yours which did not make me too happy :( and I found another one somewhere else and I’d like to get your thoughts on it. Here it is:

    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.

    Is this really legal?
    I would like to create a web application out of this concept. Could this technique be used over and over without being seen as a fraudulent by the IRS? Thank you!

  12. Author
    Kelly

    Marine,
    Notwithstanding the number of issues here, why would Joe Accountant would ever agree to this? If Joe Accountant issues an invoice and is “paid” by the non-profit, he has income. The offsetting deduction, assuming it’s valid (and I’d take the position that it isn’t), would merely make it a wash – which would mean that he’s back where he started, except that he’s done work for free.

  13. Carlalala

    What Joe needs to do is create a computer tax preparation product. Joe’sTurbo would come with live tax support & guidance from Joe. He will give you any assistance you need and a quality review check of your return before you send it off to the IRS. Joe’sNonProfit Turbo costs $185.00; but he is willing to donate it to aforementioned NonProfit. He, therefore, can take the $185.00 donation for this TANGIBLE item…yes?

  14. Author
    Kelly

    Hey Carlalala – that’s thinking outside of the box! ;) Yes, I think that would work under that fact pattern.

  15. Deb

    I have volunteered by cutting hair. I was told that I could deduct the cost of the haircuts on my taxes.

  16. Marty

    I’m creating an artwork intended for a charity. I understand that I can’t give it to the charity and receive much benefit.

    But what if I pass it through an intermediary — a collector with enough income that they could use a tax receipt? I sell it to the collector, get the cash. They donate it to the charity — and they have the bill from me saying how much they paid for it — and get a charitable receipt, which they use to reduce their income.

    Does that work? How much can they deduct that way? The full amount of the receipt?

  17. Carlalala

    Kind of a good idea, but keep in mind…
    Let’s say you sell for it for a thousand bucks. Now YOU have to declare that $1,000.00 as income (less expenses) and pay Self-Employment tax and income tax (if applicable).
    The collector will only be able to write off the FMV (Fair Market Value) of the piece at time of donation. The FMV is NOT what the collector paid for it! For example, if the art sold for 10 bucks at a silent auction…the IRS would most likely say THAT was the FMV over the 1,000 paid and only allow a 10.00 donation write off. If the art was being donated to a hospital to hang on a wall, for example…the Fair Market Value could be considered what the collector paid for it (but I would go the extra mile and get an appraisal letter) ……but….
    Be reminded, the collector needs to keep in mind that non-cash donations over 500 dollars REQUIRE IRS form 8283. And if it is valued at over 5,000 dollars an official document MUST be obtained by a “qualified appraiser”. If it is over 20,000 you are required to practically send a dossier!

  18. Tanner Watson

    Thanks a lot for the information you have been a big help.

    I work as a contract software developer though my LLC. My long term goal is to establish a non-profit organization that focuses on education. If I were to go ahead and file for a 501c3, would by LLC or non-profit benefit at all from doing what @Marine B. stated above?

    Here are the steps I would take:
    1) Send an invoice to the non-profit for services rendered. (I charge a flat hourly rate)
    2) My non-profit mails me a check for the amount.
    3) I mark the invoice as paid and deposit the check.
    4) I write a check to the non-profit for the amount that was invoiced.

    I have a meeting scheduled with my accountant to discuss the matter for later next week, but I’m just impatient and like to keep moving.

    Thanks again!! :D

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