Is it Possible to Receive a Deduction for a Gift of Services?

Summary:

In general, the answer is 'no.' A deduction cannot be taken when no income has been earned.

Answer:

Someone wrote in NONPROFIT in April, 1998:
I have met friendly folks at several Silicon Valley companies interested in
donating services to us - specifically, help with Web site design and logo
design. They normally charge for services such as this, of course, and we
were all thinking that they could take a charitable deduction on the cost
of the service. But their accountants have said that they can only write off
the cost of any equipment involved, which is minor (ink, paper), and not the
cost of staff time, which is the substantial part.

Karen Richter,
Member Services Director,
Chorus America
(http://www.libertynet.org/~chorusam) responded:
I would recommend the publication entitled "How Much Really Is Tax
Deductible". It is published by the Independent Sector (along with a
variety of other publications) and is a slim book filled with rules that
address issues just like the one you raise in your post to the board. You
can go to http://www.independentsector.org and then click on publications. I keep my copy on my desk at all times!

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Earlier, Putnam Barber offered this explanation of the general theory on which the accountants' advice is based:
There's an important terminological issue that is critical to these
discussions.

Corporate income taxes are assessed against net income -- i.e., gross
receipts minus business expenses.

Personal income taxes are assessed against "adjusted gross income" -- with
lots of deductions, exemptions and special treatment for certain activities
to reflect Congress's view of what constitutes tax simplification.

If the time spent by a corporate bigwig (or any other employee) is a
legitimate business expense, then the corporation paying her/his salary
"deducts" salary payments and other out-of-pocket expenses before
calculating the net income on which its taxes are due.

An individual who contributes labor to a charitable project (either a
volunteer whose day job earns a salary or someone who is self-employed)
receives no (additional) income and hence incurs no additional taxes.
Out-of-pocket (cash) expenses (paid, obviously, from other income subject
to tax) may, legitimately, be deducted before calculating any taxes due.

The principle that you cannot deduct a cost-free donation doesn't seem odd
to me. The income tax laws are about income -- receipts of households
and corporations. Where there is no income, there can be no tax
liability....and no tax deduction.

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The person who asked the original question responded with:
Could the logo design co. include their standard labor costs in developing a
logo for the charity as a business expense, thus reducing their net income and
in effect getting a tax write off?

And David E. Ross responded:
The actual costs of creating the donated product or service -- labor,
materials, etc -- are deductible as ordinary business expenses. For
generous businesses, this is better than a charitable deduction, which
is limited to some percentage of revenues. Ordinary business expenses
-- if real and actual -- are not limited. On the other hand forgone
profits are not deductible any more than if a blizzard or strike stops
sales.

A reader used the FAQ Feedback form (see the top of the yellow panel to the right) to send this "Comment" on January 21, 2006:
It seems to me that the tax laws bend way over, in terms of time
donated by individuals and corporations when they are donated
attorneys and/or law firms, who milk the "pro bono cow"
successfully. Why is an attorney's time tax deductible, while a
writer's is not? (I assume it is because very few writers are
senators, but that's just an opinion).

Putnam Barber responded with:
If the attorney's firm is providing compensation for the time that's spent, then we're not looking at "revenue forgone" but at a corporate (or partnership) expense.

Many corporations treat such expenditures under a generalized "marketing" heading, making them business expenses and hence not contributions at all. Others set up a probono fund, charged against net income, and pay out of that fund when probono work is done.

A writer for a public relations or scriptwriting firm could be treated, in theory, in the same way. But there aren't any rules in those lines of business that require probono work (at least I haven't heard of any).

There's no special feature of the tax laws that applies to attorneys or accountants in this regard. It's just that the practices of many firms in those industries encourage some probono work in a routine way while few other industries have a similar pattern.

Earlier, Putnam Barber offered this note on another approach to this question:
It is sometimes suggested that a consultant or other individual could bill the nonprofit for the work and then, when paid, donate the payment back to the organization, thus qualifying for a personal tax deduction. This strategy doesn't work very well. All the payroll taxes (Social Security, etc.) will be due on the income received. The deduction of the gift indeed reduces adjusted gross income and hence the taxes due. Unless the taxpayer is in the (nonexistent) 100% bracket, though, the effect of the deduction is always going to be less than the original fee. Consider this oversimplified example of a taxpayer in the 28% bracket:

Other income	Fee	Gift	AGI	Tax	Net Income
$50,000	$5,000	$5,000	$50,000	$14,000	$36,000
$50,000	$5,000	$0	$55,000	$15,400	$39,600

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Posted 4/29/98; revised 2/11/05, 1/21/06 -- PB