[thelist] Charity and taxes was: Re: list confrontations, was: [thelist] Org Chart?

deke web at master.gen.in.us
Wed May 2 22:27:41 CDT 2001

On 2 May 2001, at 23:58, Martin posted a message which said:
> >I asked my accountant a month ago (for obvious reasons). He advised me that
> >only the *expenses* incurred in the production of donated services are tax
> >deductable. There appears to be no gain since those expenses are tax
> >deductable anyway (because they are business expenses). He says that you
> >can't/shouldn't do the "i would have charged a 'real' client $10,000, so
> >i'll deduct that $10,000 as a contribution instead."
> In which case, you're maybe better billing the $10k and donating it back.

If the business donates it back, then it's a wash. If you have 
$10k extra income and $10k extra deductions, there's no 
benefit - but there *is* the hazard that the $10k deduction
will be disallowed for whatever reason. Perhaps the organization
hasn't done the paperwork to legitimately be a 501(c)(whatever). 

If the business bills the $10k and you donate the money 
*personally*, then you have a deduction on Schedule A. 
Unless you own a house, you probably take a standard
deduction, and itemizing won't give you the entire 10k. 

You'll also end up paying extra money on Schedule SE, 
which is not always a bad thing: it will bump up your 
earnings record and if you become disabled in the near 
future, it can make an important difference in the Social 
Security disability income you collect. 

A part-timer may want to boost his income this way in order
to help meet the 3-out-of-5 years rule. While any enterprise
conducted with a reasonable expectation is a business, you
may be asked in an audit to show that you can reasonably
expect a profit. If you make a profit in three of the five years
prior to the year under examination, however, there is an 
automatic presumption that this is a business, rather than 
a hobby. 

Both business and hobby income are taxable, but while
some business losses reduce your taxable income, hobby
losses *never* do that. Increasing business income can 
make home business office expenses more deductible, and
lets you claim a larger Section 179, in which you expense
capital expenses rather than to having to spread the cost of
a computer over five years (even though it only lasts about
three years.)

There are 43 states (and the District of Columbia) that have
income taxes, and your own state's rules will affect the 
consequences of what you do.

<tip type="tax planning">
Although most businesses donate goods and services, rather
than giving the charity the money to purchase those goods 
and services, this may not be optimal financial planning in 
all situations. 

Although most tax preparers try to reduce current year taxes
for most clients, this may not be the optimal financial planning
in all situations.

A continuing relationship with a aggressive and knowledgeable
tax preparer is not cheap - but paying less could cost far more.


 "The church is near but the road is icy; 
  the bar is far away but I will walk carefully." 
                            -- Russian Proverb

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