That’s great that you are donating your time and value – but don’t expect an additional tax deductions for it. For the most part – it’s already deducted as part of your normal overhead expenses. Here are the simple details.
Disclaimer: This article is not tax advice. The tax code is complicated and you should consult with a CPA or an EA (and IRS publications) to make sure that your tax information is reported accurately.
Business charitable services –your time is worth a ton of value, of course – but you can’t deduct it.
If you are a business owner and you gross $400,000 a year in sales, of course your time is worth about $350 to $400 per hour. It’s natural to think that if you spend 3 hours donating your services, that you could write this off.
But you can’t.
The IRS rules are very clear about this. Your time is never tax deductible.
The logic behind the tax code rules about this that if you donate 3 hours of your time, that’s 3 hours of less sales for your business. So, there’s $1200 that you could have made somewhere else that you did NOT record as sales. So, it’s already deducted. You can’t take it again as a charity deduction.
Business charitable services – your overhead expenses are already deducted.
Let’s say I (me personally) decide to prepare and donate a $1400 tax return for a non-profit client as a charitable donation.
I incurred a lot of expenses to make this happen. I have employee expenses, rent, health insurance, software, and office supplies just to name a few.
One would think logically that it would only make sense to write this off as a $1400 donation expense, right?
No, I cannot!
Because all this overhead is ALREADY being written off as tax deductible expenses. If I were to write it off again, that would be double-dipping.
This could maybe be a charitable deduction is if I paid my own corporation $1400 for the tax return. Then, the company would have a $1400 sale (income) and I personally would have a $1400 charitable donation.
But even that is not really legal because technically my corporation is not a non-profit organization. I would have to write a check to the non profit for $1400, then they would pay my company the $1400. My company would have a $1400 sale (income) and I would personally have a $1400 donation deduction to the non profit.
Business charitable services – direct donations are not a business expense in most cases
Let’s say I do not donate services, but I outright give $1400 to a charity from my business. I write a check.
In modern days, most business structures are now pass-through entities for tax purposes. The tax code clearly states that a pass-through entity that gives money to charity does not take the deduction at the company level, but it is taken as an itemized deduction at the personal level.
This personal deduction might be limited in many ways and it might even be better to take the standard deduction, especially now that the standard amount has been increased under the new tax rules.
Again, this is if I write a physical check – it’s not if I donate services. This is the only way I can get a deduction for charity given from my pass-through entity. And it then becomes a personal deduction.
In summary, many business owners feel like they should get a deduction for the services they donate. The reality is that the deduction is already part of a businesses expenses and can’t be deducted again as charity.