hyprlocal Product Donations
Product & Service Donations for Small Business
How to Donate a Work Product as a Tax Deduction
If you have work products you wish to donate, you can take a deduction for the donation on your income tax return. Regular corporations use Form 1120 to report business income and charitable donations. However, S-corporations, sole proprietorships and partnerships are flow-through entities, meaning that although the business may make a donation, the deduction is typically accounted for on the owners’ individual income tax return – Form 1040. To receive the deduction, donations must be made to a charitable organization, such as a church, school or thrift store. Donations made to private or political organizations are not deductible.
1. Determine your cost basis in the product. Your cost basis is the amount you paid to purchase the item, or the amount you paid to have the product made.
2. Determine the fair market value of the product. The fair market value is generally the amount that someone would pay for the item. In some cases, the fair market value equals the amount you would sell the product for, but in instances where the product is outdated, the general public may place a lower value on the product, even if you would normally charge more for it.
3. Select the lower amount from your cost basis and fair market value calculations. You may take a deduction for either your basis in the product, or the value of the product, whichever is less. You may not take a deduction for the higher amount. In many cases, manufactured products decrease in value over time and the fair market value is lower than the cost basis for the item. However, in some cases, products may increase in value over time. Examples of products in this category may include those that contain precious gems, or items that are considered collectibles. For these items, the cost basis is generally lower than the fair market value.
How Service Donations Work
Service donations are LARGELY pro bono
Pro bono service refers to work that’s performed or provided without charge to benefit a cause, or for the good of the general public. Some expenses for performing pro bono services are tax-deductible, but many are not.
Volunteer hours are generally not tax-deductible. The IRS is additionally a little fussy about what constitutes professional services, and providing a service doesn’t necessarily mean it constitutes pro bono work.
It is important to distinguish between donating professional services and simply volunteering time and labor.
Claiming a Deduction
A tax break for charitable contributions is an itemized deduction. You can’t gain any tax benefit from claiming them unless you forego the standard deduction, and rules and limits apply. The Tax Cuts and Jobs Act virtually doubled standard deductions beginning in 2018, and many taxpayers find that the deduction they’re entitled to is more generous than the total of their itemized deductions.
Normally, you would be limited to claiming overall charitable contributions of no more than 60% of your adjusted gross income (AGI). You’d have to add your pro bono time to any other donations you made, and you could only claim an itemized tax deduction up to this portion of your AGI.
The 60%-of-AGI rule is temporarily waived in response to the coronavirus pandemic. You can claim a deduction for up to 100% of your AGI in tax year 2020.
Services and Time vs. Expenses
You generally can’t deduct the fees that you would normally charge for your services as pro bono services, but you might be able to take deductions for certain qualifying expenses on your tax return.
For example, you can’t deduct $300 for two hours if you normally charge $150 an hour for your services. The IRS clearly indicates that you can’t deduct the value of your services or your time that you spend helping others. But you can deduct expenses that you incur in the process of giving your time or services to others.
Maybe you incurred a tangible expense because you paid an employee $500 to make a website template for a charity, then you gave the template to the charity for free. The $500 might be tax-deductible. But your own personal time isn’t tax-deductible if you’re a marketing consultant and you donate 50 hours to a charity to help them with their marketing. Your professional time isn’t deductible.
Now let’s say that you had to travel to the charity to meet with them. Travel-related expenses are typically considered tax-deductible because they’re an expense that’s tied directly to the donation of your professional services.6 It’s not likely that this will give you a significant break on your taxes, however. The IRS standard mileage rate for driving for charitable purposes was just 14 cents a mile in tax year 2020.
Expenses That Might Be Deductible
All pro bono deductions must meet two IRS qualifying rules:
- They must be incurred as a requirement to perform the service for the organization, and
- They must primarily benefit the charity and not the taxpayer6
An example would be the cost of supplies that are necessary to providing or performing the service that directly benefited the charity.
The burden is on you as the donor to prove that a donation was made if you’re going to take a charitable deduction. Save all receipts and be sure to get one from the charity.
The IRS can deny the deduction if you can’t substantiate all expenses.
Expenses You Can’t Deduct
You typically can’t deduct the cost of equipment purchases that you’d keep. For example, you couldn’t claim a deduction for the purchase of a computer to set up a donor management system unless you also gave the computer to the charity.1
Likewise, you couldn’t deduct the cost of a postage machine to do a mass mailing more efficiently, but you could deduct the cost of postage.
IRS Red Flags
The IRS will typically deny deductions when the individual or business substantially benefits more than a charity.
Never try to deduct the cash value of your services for professional or service fees without talking to an accountant. You won’t be able to take any deduction for such fees in most cases.