In an effort to reduce the amount I have to pay to Uncle Sam wondered if Pro Bono work is tax deductible since it is technically is a donation of my services.
Would it only be tax deductible if the work is for tax-exempt organizations?
That work won't reduce your tax liability. The value of your time is never deductible, and other contributions which are must be made to a registered nonprofit charity.
You cannot deduct contributions to organizations that are not qualified to receive tax-deductible contributions
You cannot deduct the value of your time or services, including:
The value of income lost while you work as an unpaid volunteer for a qualified organization.
EWven if you could deduct for the time you spent you'd then need to include the same amount as income and they'd cancel out for the same result.
That makes no sense Stephen, unless Australia has some rules which create magic income where you've not been paid. The US doesn't.
My accountant put it to me this way: "Your business is on cash accounting. You don't get the cash, we don't get to account for it."
Meaning... what Dan said!
You must have misunderstood what I was saying.
I was just pointing out that IF you were to somehow allocate an actual cash value to the time that you spent on the pro bono work in order to come up with a figure to claim as a tax deduction for doing that work then you would have to account for that amount as income for the work in order to be able to claim it as a deduction - along the lines of they agree to pay $100 for the pro bono work provided that you donate that money back to them - provided that you are entitled to claim the donation then the two would cancel out. If you are not entitled to claim the donation then you are better off not trying to assign a cash value to the work as if you did then you'd have income to declare and no deduction. Whichever way you work it out the best situation you can get for pro bono work is where you don't have to pay any tax on it.
In Australia it would make a difference if it were an exchange of services rather than a donation of services with only one party registerd for GST since then you do need to work out the value of the services in order to pay the tax on that half of the exchange.
Stephen, they wouldn't pay you $100 for you to make a $100 donation, they'd simply give you a receipt for a $100 donation without any money changing hands. There would be no income. If it were allowed, it'd be the same principle as any non-cash donation.
If you bring a sofa to a thrift store which is a registered charity, they give you a receipt for the fair market value of the sofa. They don't first pay you that value and have you hand it back as a cash donation. The sofa doesn't get added to your taxes as income. The fair market value of the donation is deductible and decreases your tax liability.
Back to the services though, let's look at the tax code I linked again:
Any expenses you incur in the process of donating services are deductible. Nothing is added to your income. The expenses simply increase your deductions. You'll find lots of questions and answers on that page with example situations in which people are volunteering their time. In no case is income ever artificially increased in association with a deduction.
Which in so far as your tax position is concerned would be the same thing. If they have valued your work at $100 and given you a receipt for that amount of donation received then if you were to declare that as a deduction (which you wouldn't) then you would also have to declare it as income.
No, you wouldn't... the ONLY affect would be increasing the value of the itemized deductions, line 40, on form 1040 (and attaching a Schedule A listing the donation on line 16). No other value would change. You're making it out to be a situation where deductions don't reduce tax liability at all, which is clearly not how it works!
I've put the IRS rules right in front of you. captaincarne is in the US. This is the tax code.
Obviously the US treats things differently than many other parts of the world where you are required to pay tax on the deemed revenue from any services that you provide.
Volunteering does not provide you any revenue. In the US, you only pay taxes on money you actually earned (aside from the technicalities of capital gains and the like). I can't imagine you being unemployed, making no income, volunteering web design services for a few months, and reporting tens of thousands of dollars in taxable income to your government.
Reading through your country's tax documents, I see nothing about adding to income. The examples of how different donations would affect tax liability seem to mirror the US tax code perfectly.
In Australia if you are registered for GST (Goods and Services Tax), which is optional if your business income is under $50,000 a year but mandatory if it goes above that, then you are required to calculate the deemed income from any services that you provide for which you receive any form of non-cash remuneration. The GST of 10% is then payable on that income that you didn't receive and needs to be paid at the end of the quarter.
So if you wanted to be able to claim the $100 for donated services at the end of the year and you are registered for GST then you need to declare a GST inclusive income of $100 for the quarter and pay the $9 tax on it. Then when you lodge your tax return in July you would specify $91 income and $100 deduction and claim the tax deduction for the donation getting you back about $3 of the $9 paid.
As this places you in a worse tax position than if you were able to ignore the whole thing, people would try to ensure that any pro bono work like that is done via an entity not registered for GST (so if you have a partnership or company registration you'd do the work as an individual). Then since no money has changed hands and there is no GST implication requiring the calculation of deemed income you can just ignore the whole thing.
It is only where there is a deemed GST liability where there would be any need to mention the transaction for tax purposes at all.
What is the non-cash renumeration involved here if you're not paid, in cash or goods, for your volunteer service?
It would be whatever the normal charge would be for the services provided if the service were being provided to the general public and the recipient were paying for it.
I don't have any specific examples of this particular type of deemed income but the following is a real example of having to calculate deemed income and pay GST on it. One of the clubs I belong to has to keep track of how many members have been given an honorary membership for the year so that the tax can be paid on what they would have paid for their membership if they didn't have an honorary membership. Since we also have members who do pay the income for the honoraries is deemed to be the same as the other members pay.
We're at the same place still. The act of volunteering does not produce taxable income for the donor.
We were never talking about being paid for the volunteered services. In your example, the volunteers are being paid (in free memberships) and their tax liability is the value of the memberships, not the value of the services they provided as volunteers.
You quoted me saying "if you're not paid, in cash or goods", and you reply with an example where the volunteers are paid.
The IRS is very clear on this: donated service has no revenue associated with it, so there's no taxable value and no taxable deduction either. You can't just get a receipt for supposedly doing $100 in services and take that off your taxes.
If the charity pays you for the work, that's $100 on your revenue line. You can then donate back that $100 (a tangible asset transfer) and get the $100 deduction, but it's a zero-sum game.
In the original query the donor is being paid if there is an amount that can be claimed as a tax deduction as they have received that payment for their work - in the form of a deduction rather than as an actual payment.
It would in Australia if the donor is registered for GST as then they are required to pay tax on the deemed income equivalent to what they would have received if they were paid for the work so if they usually charge $100 per hour and donated one hour worth of work then they'd be liable for $9 in GST even though they didn't actually get paid - at least that would be the case if they wanted to be able to claim a deduction for the donation of their time since in that instance they are receiving a payment for that time equal to the amount that they are claiming as a donation. If they are not actually trying to claim a deduction for the donation of that time then they wouldn't be required to account for the income associated with it.
Basically the best result tax wise is what you gewt when you don't try to claim the donation at all. In order to claim any deduction for the time spent you'd have to equate that to the income you would have earned if you were charging for it which would be the same amount as the amount of the deduction you could claim and being able to claim the deduction against that income can at best reduce the tax on that income to zero. There are circumstances in Australia where attempting to claim a deduction for time spent on pro bono work would result in your having to pay more tax than if you didn't try to claim it and there are no situations where trying to claim it would reduce your tax liability.
You're speaking nonsense, I've already linked to documents from which you can find your own tax code saying otherwise, I'm done. The hypotheticals are pointless, you can't claim a deduction for volunteered time, that's in your tax code and ours. The original poster's question was answered in the first response.
The OP is in Nevada, USA, so that doesn't apply here. IRS rules apply.
Not every one on the forum is in the US and laws can vary around the world. Also the majority on the forum would be unfamiliar with much of what is in the tax laws even for their own country. Dan's quick examination of Australian tax law didn't find any of the circumstances where someone might be required to declare a deemed income on what someone might consider to be volunteer work and so he has made the assumption that such circumstances don't exist.
The only reason that I posted my original comment was to point out that what applies in one country does not necessarily apply in another.
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