By Kerry Weaver, CPA | Published 07/01/2022
“How can I deduct donated services?”
As a trusted advisor, I get this question many times a year.
I hate that my answer is always, you cannot. My clients always come back with a “Yeah, but what about…?” As creative as they get, it never changes my answer. In the discussion below, we delve into the ins and outs of donated services for small businesses.
Who can deduct donated services?
Let’s start dissecting this topic by reviewing the definition of charitable contributions per the IRS Publication 526, Charitable Contributions. In general, a business or person can deduct contributions of money or property you make to, or for the use of, a qualified organization. The IRS is very careful to include the words money or property in the definition. The definition is also clear that the donations must go to a qualified organization. In general, this is a 501(c)(3) organization.
Donated services are simply not tax deductible for businesses and individuals alike.
Why donate services?
Another way to look at this is that the time you spend working on the pro bono work is time you are not working on billable services, reducing your taxable income. As an example, your hourly fee is typically $350, and you spend 2 hours working on a pro bono project. This omission of billable sales totaling $700 is an automatic reduction of taxable income.
There are tangible costs related to providing donated services that are deductible:
- Payroll costs if your employee works on the project
- Subscriptions or website fees incurred
- Photography, video & printing costs
- Mileage reimbursement, if any travel is involved, at the current charitable mileage rate.
Be sure to give weight to the intangible benefits on providing donated services. Intangible benefits include:
- Getting your firm’s name out there in a positive way can lead to paying jobs. Being in the service industry myself, I have found that people remember generosity. It can give you an edge on the competition, or at least your foot in the door.
- Donated services can increase the amount and quality of your portfolio to show off to potential paying clients.
- Donated services can offer exposure and experience to new sectors for you and your employees.
- Choosing a cause that is fun or close to your heart makes the work rewarding on a personal level. Consider letting your employees choose a cause to deepen the team spirit.
Another thing to keep in mind is in today’s world, most small businesses are structured as a pass-through entity. The current tax code does not allow for charitable contributions at the business level for a pass-through. The business expense of a charitable contribution flows to your personal return for deduction. This personal deduction can be limited in many ways, and remember the standard deduction has increased under the new tax rules. This gives donating services rather than money another mark in the positive column.
At the end of the day, donating services from your business can be advantageous. You deduct the overhead expenses, increase your portfolio and get positive exposure that may lead to future paying gigs.
If you have additional questions about how to make donated services work in your favor, please reach out!