Making the most of tax deductions for donated products and services
Topic: Taxes & Accounting
Time Investment: 5 Minutes
Suggested Product: Ultimate Tax Kit
As a Photographer, or as part of your Photography business, you may be asked to participate in any of the above by donating goods and services. It may even be part of your marketing or operating plan to give back to your community in some or all of these ways.
How do you best contribute while also making sure that you and your business make the most of available Tax deductions?
It’s all in the records you keep! There are recordkeeping and substantiation rules imposed on donors of charitable contributions and disclosure rules imposed on charities that receive contributions. Firstly, let’s make sure we’re on the same page about what makes an organization, a charitable organization – generally speaking this is going to need to be a 501(c) registered organization. If you are not sure ask a representative of the organization about their charitable status and tax deductibility prior to making a donation.
So, what are the basic requirements for making sure a monetary donation is tax deductible?
- As a donor, you must have a bank record or written communication from a charitable organization for any monetary contribution before you, as the donor, can claim a charitable contribution on his/her federal income tax return.
- As a donor, you are responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before you, the donor, can claim a charitable contribution on his/her federal income tax return.
- a charitable organization is required to provide a written disclosure to you, as a donor who receives goods or services.
Where you donate goods and services, the rules about an acknowledgment of the contribution before claiming it as a tax deduction are the same, with one exception – there must be a description of the goods and services provided. A value is not usually included on the acknowledgment from the charity. Along with the written acknowledgment provided by the charitable organization, you should keep an invoice/receipt of your own explaining the cost had the charitable organization purchased these goods and services from you. You don’t need to submit these to the IRS, just keep them in your files – although your accountant may ask for them.
Here’s an example of what a written acknowledgment might include:
“Thank you for your contribution of a voucher for a family portrait session that (organization’s name) received on October 15, 2016. No goods or services were provided in exchange for your contribution.”
Just so you know – there are no IRS forms for the acknowledgment. Letters, postcards, or computer-generated forms with the above information are acceptable. An organization can provide either a paper copy of the acknowledgment to you, or an organization can provide the acknowledgment electronically, such as via an e-mail addressed to you as the donor.
Although it is a donor’s responsibility to obtain a written acknowledgment, organizations often assists donors by providing a timely, written statement containing the following information: name of organization, amount of cash contribution, description (but not the value) of non-cash contribution, statement that no goods or services were provided by the organization in return for the contribution, if that was the case, description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
It is not necessary to include either the donor’s social security number or tax identification number on the acknowledgment. A separate acknowledgment letter may be provided for each single contribution of $250 or more, or an annual summary may be used to substantiate several single contributions of $250 or more. Separate contributions of less than $250 will not be aggregated. An example of this could be monthly donations to an organization of less than $250 even though the donor’s annual total contributions are $250 or more.
Timing Matters
For the written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution; or the due date (including extensions) of the return. Organizations usually try to send written acknowledgments to donors by January 31 of the year following the donation.
Unreimbursed expenses as donations
One area that is often overlooked when it comes to donating goods and services to an organization (or even a partial donation if a charitable organization is not able to pay you market value for your goods and services) is that of unreimbursed expenses. If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses, e.g., out-of-pocket transportation expenses incurred in order to perform donated services for an organization, then the donor must obtain a written acknowledgment from the organization containing: a) a description of the services provided by the donor; b)a statement of whether or not the organization provided goods or services in return for the contribution; c) a description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
An example of an unreimbursed expense: You are donating your photography services to an annual convention of a charitable organization and you purchase an airline ticket to travel to the convention. The organization does not reimburse you for the $500 ticket. You should keep a record of the expenditure, such as a copy of the ticket. You should then obtain a description of the services that you provided and a statement that the representative received no goods or services from the organization.
As the example explains, a donor must maintain adequate records of the unreimbursed expenses. Some examples might include, mileage logs, invoices or receipts, pricelists, tickets, or receipts.
In Summary
A donor cannot claim a tax deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a contemporaneous, written communication from the charity (such as a receipt or letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
For More info
For more: IRS Publication 1771, Charitable Contributions–Substantiation and Disclosure Requirements, explains the federal tax law for organizations such as charities and churches that receive tax-deductible charitable contributions and for taxpayers who make contributions.
Detailed rules for contemporaneous written acknowledgments are contained in Section 170(f)(8) of the Internal Revenue Code and Section 1.170A-13(f) of the Income Tax Regulations.
See Publication 526, Charitable Contributions, for a description of records that will substantiate a donor’s contribution deductions.
