I recently did $3000 worth of work for a local non-profit and when I asked my accountant if it was a tax deduction she said no. She also says that I have no deductions from any non-collected invoices.
Does anybody have any experience with this sort of thing?
My understanding is that donations of certain in-kind services may not be tax deductible, but I have little knowledge of that issue.
The second situation, "writing off" non-collected invoices, only works if you are using the accrual accounting method and have already claimed the amount as income (claimed at time of invoice). If you use the cash accounting method and you claim money only when it actually comes into your possession, you can't write it off because you never claimed it as income in the first place.
Most small firms use cash accounting. Dollars in, dollars out.
> Most small firms use cash accounting. Dollars in, dollars out.
You nailed it there with the cash v accrual. I'll do some stuff for free, depending on my liability exposure. But generally it's a trade of service of some kind and nobody wants any money. (hope the Infernal Redinthenose Snervice guys ain't listening)
No such thing as "non profit" anyway. Somebody has that $3K bill on their desk, and it likely found it's way into some administrators wallet after it got processed - expenses. No "profit", just expenses. It's all BS
Accept A Check, Sign It And Return It
By accepting the check you have in fact been paid, you pay taxes on it and it goes against your E&O.
Returning the money is the donation. You have a personal deduction. You do not want to get into business donations unless you like to pay your accountant a lot.
Paul in PA
The general method is to do the work, bill the organization, get paid and then return the money to the organization.
Most non profit organizations are signed up with the state and you can download a tax exempt certification online from the state webite for your records to avoid paying tax.
You need the paper trail for it to be legal.
0.02
What they said is correct. Assuming cash basis which I have never seen a small business that was not you don't record income until you receive it. If someone doesn't pay you don't write anything off because you never recorded any income in the first place. You do get to claim the expenses of doing the job and they act as a deduction but that is about it.
I think it works the same on donated work. You get to claim your expenses of doing the job but that is about it.
Ok, thanks for the info.
A learning experience
> The general method is to do the work, bill the organization, get paid and then return the money to the organization.
>
> Most non profit organizations are signed up with the state and you can download a tax exempt certification online from the state webite for your records to avoid paying tax.
>
> You need the paper trail for it to be legal.
>
> 0.02
Maybe I am dense but can you explain the purpose of this?
Let's say you do $3000 of work for a church. They pay you. You will owe taxes on the $3000. Additionally this amount goes toward your total annual revenue for purposes of calculating insurance costs, maybe certain state taxes, Etc.
You then turn around and donate $3000 to the church. This reduces your AGI by $3000 which offsets the income tax due from being paid for the work. You owe no tax because of this, you didn't save any tax, and you didn't make any money. Why not just do it for free? I am not understanding the benefit of being paid and donating it back.
Exactly: charging the fee and giving it back is just a wash, with no tax benefit. (+3000-3000=$0 deduction)
If you donate goods to an organization you can often deduct the value of those goods as an "in-kind" charitable contribution. The organization gives you a receipt for the value.
From my understanding, the difference is the IRS does not generally view in-kind services as tax deductible. If they were, you could just request a $3000 receipt from the organization as an in-kind contribution and itemize it on your taxes. But since it's a service and not a good, you can't.
> The general method is to do the work, bill the organization, get paid and then return the money to the organization.
That's just plain silly -- it creates a bunch of paperwork without netting anything. It might even cost you money by inflating your gross income, on which things like business license tax and E&O cost are based.
I do the work and send a letter to the organization noting the market value of the work had it not been donated, just so they appreciate what they're getting.
It May Increase Your E&O
You want a project like this on the books should there be a claim.
You want a written contract for the work to meet State Board requirements, which do allow free work for eleemosynary organizations.
With E&O rates usually based on total project value, the $3000 in $3000 out still costs you some E&O dollars. So it is not a clean wash, but still worthwhile.
Doing a project at no cost does not reduce your liability.
Paul in PA
It May Increase Your E&O
> You want a project like this on the books should there be a claim.
If the client can prove you did the work, you're covered. If they can't prove you did the work, you're not liable.
Do You Have A Letter To That Affect From Your E&O ?
Paul in PA
Do You Have A Letter To That Affect From Your E&O ?
My policy states the insurer's obligation "to pay on behalf of the assured those sums which the assured shall become legally obligated to pay as damages and claim expenses by reason of a claim arising out of any negligent act, error or omission in rendering or failure to render professional services by the assured or by any person for whose negligent act, error or omission the assured is legally responsible."
There are several pages of exclusions, but none mentions services rendered without fee or written contract.
Accept A Check, Sign It And Return It
> By accepting the check you have in fact been paid, you pay taxes on it and it goes against your E&O.
>
If you do work you are liable. Whether or not you got paid is irrelevant.
Larry P
> . Why not just do it for free? I am not understanding the benefit of being paid and donating it back.
An excellent question. Why not just do the work for free?
I have done many jobs where I supported the organization enough to donate the work. I always, always, always send a full price invoice and a discount that is the same amount.
Using this method does several things. First, free things have less inherent value than something paid for. But isn't using a discount = the invoice system the same as free? No. Not by a long shot. The full price invoice establishes the value of your service in the minds of the client. "Wow, Drilldo just gave us $3,000 worth of his professional services!" This may seem like a small matter but it is really important that we do the little things that help client understand the value of a survey.
Also, many of the organizations for whom I have worked in this manner, have been able to use my work as a "matching funds" that are required by many grants. Often grants come with a "you kick in $5,000 of your own money and we will give you our $10,000" type provision. Your survey ($3,000 value) gets the organization a long way toward the $5,000 they must provide. If you just say, no charge, they do not receive that benefit.
Larry P
It is not a wash
I always donate my services, so there is no bill, although the non-profit is well aware of how much they just saved.
If you bill it, and later send a matching check, it is not a wash. Your total income has gone up, which means your with-holding taxes for this year go up, your workman's compensation payments go up, and your insurance goes up. Next year you can claim the deduction, but in the meantime the IRS has held onto the tax on that amount without interest.
Hmm ... washout?
$3000 is the fee and is donated back ... that washes out the $3000, if you can in fact get 100% credit.
But what about the cost of actually performing the work ... crew time and such that you also paid out to cover?
Are all these costs simply written off on the profit/loss sheet?
For that matter, where on the tax forms is the $3000 written off, if it's on a form other than the 1040, C, D, or profit/lost(is this the "c" form?), then do you have to claim the 3000 as income, declare the income on the 1040, then attempt to get credit off the itemized deductions?
Gawd, I'm glad I don't do this stuff anymore.........
> But what about the cost of actually performing the work ... crew time and such that you also paid out to cover?
>
Isn't that already a deduction. You don't (or shouldn't be) paying income tax on money you pay your employees.
So shouldn't there be an invoice?
> If you do work you are liable. Whether or not you got paid is irrelevant.
>
I agree you are liable whether paid or not.
I get the impression some guys are saying just do it for free without making an invoice.
I realize this thread was started based on nonprofit clients, but let me put a spin on it. Suppose you do "free" work for your best friend, brother, kid, etc. Wouldn't you always want there to be an invoice? You could always make out a detailed invoice showing what the charges would be, totaling the $3000 and then show 100% discount.
I think I would want an invoice to show my E & O in the event a claim is filed on this free work. That would give show exactly what work I preformed. I realize most people have contract for the work but what does it hurt to have an invoice also.
This is all speculation on my part, I do not own a company, nor do I handling the billing where I work. Just trying to think of how I would handle it if I ever do own a business. This the kind of thread that I gather opinions from for possible future use.