Here’s a topic that always gets a business owner’s hackles up: taking deductions for donating professional time or services to a charity.
The bottom line with it is, you can’t deduct the value of your donated time.
Here’s an example:
Joe is a consultant. He normally bills his time at $250 per hour. He provides 4 hours of services at no cost to one of his favorite not-for-profits. Joe wants to take a $1,000 deduction. His actual deduction for this is $0.
Alternate scenarios that often arise:
Joe’s favorite not-for-profit is holding a silent auction to raise money. Joe decides to give a gift certificate for $500 of his services to the lucky auction winner. Again, Joe doesn’t get a deduction for this.
Now, let’s say Joe gives cash to the not-for-profit instead.
If Joe instead gives $1,000 cash to the not-for-profit, he’d get a $1,000 deduction because he actually lost (paid out) $1,000.
Is it a fair outcome? Most would say it is not. But here’s the “why” as to why Joe gets no deduction.
Understanding the Logic
Let’s start with the third example first. In that situation, Joe gets a deduction because he spent money and thus suffered a loss or reduction in income/assets by paying out the $1,000.
Now let’s look at the first example. In a normal situation, Joe provides 4 hours of services, and the client pays him $1,000. Joe records $1,000 of income on his books.
In our example, Joe provides the same 4 hours of services but bills $0 to the not-for-profit. He records $0 of income on his books, in effect getting a “deduction” of sorts in the form of recording $1,000 less income than he usually would.
In the second example with the gift certificate, Joe doesn’t get a deduction because the gift certificate in and of itself isn’t an expenditure. He hasn’t paid out any cash.
So, what happens when the auction winner redeems the certificate?
Let’s say Joe provides 4 hours of services to the auction winner and bills them $1,000. The client has a $500 gift certificate and so only pays Joe $500. Joe records $500 of income on his books, in effect getting a $500 “deduction” because he’s putting $500 on his books instead of the usual $1,000.
What if the auction winner doesn’t need Joe’s services, and the certificate gets tossed in a drawer and eventually thrown away and never used? In this case, Joe gets no deduction because again he hasn’t really lost anything or spent any money. Therefore, his deduction is $0.
Always a Sore Spot
In my experience, these sorts of conversations with business owners ALWAYS — 100% of the time — go badly. And one can have a philosophical argument about whether or not it’s fair to not provide a real deduction for donated services. But there is some underlying logic as to why the outcome is what it is when a business donates services.