Are Donated Services Eligible for Charitable Deduction?
We have numerous clients that donate services, whether it’s a free photography session donated to a charitable fundraiser event or gift certificates that are donated. When it comes time to do taxes for the client, we always have to explain that donated services are not tax deductible.
The IRS lists specific contributions that are not deductible. Specifically, the IRS states that the value of time or services is NOT deductible as a contribution. The only way to deduct the contribution would be to record the donated service as income and then deduct as a contribution, which provides you no benefit because you have to pick up the contribution as income. The main reason behind this rule is that cash donations are made with after-tax dollars, but a donation of time and services is not. So, you earn money, pay tax on it, and then make a cash donation with which you are entitled to receive a tax benefit because you paid tax on the money when you originally earned it. In the case of a donation of time and services, the time and services were never taxed in the first place, so you should not receive a tax benefit for them.
So, what is eligible as a charitable deduction? Taxpayers can deduct contributions of money or property made to a qualified organization. Keep in mind that if you receive any kind of benefit from the donation (such as season football tickets), you cannot deduct the portion of the contributions that represents the value of the benefit you receive. For example, if you make a $2,000 donation to the Pirate Club and you receive season football tickets, only the portion of the donation above the value of the season tickets would be deductible. Normally, you will receive a letter that states what portion is deductible or not-deductible, but always keep in mind the rules of deducting charitable donations.
Moving forward, remember that to receive a charitable deduction on your tax return, the donation has to be a contribution of money or property to a qualified charitable organization. If you do donate time or services, you will not get a tax benefit, but will still get that feel good sensation.