Chances are you’ve been asked to volunteer before. Maybe you got trapped, er, talked into leading a Brownie troop. Or running (okay, walking) a 5k for a good cause. In your professional life, maybe it was to do some pro bono work to help a charitable organization. If yes, it would seem reasonable to write off your mad skills, aka all those hours spent consulting, coding or otherwise providing billable services, on your business tax return. After all, your time and skills have real market value.
Alas, the IRS disagrees. Simply put: The IRS does not allow you to deduct your normal billing rate as an in-kind donation on your tax return. However, before you denounce all good deeds and curse the IRS, you may be able to claim “do-gooder” deductions. These “do-gooder” deductions are certain qualifying expenses incurred while working pro bono for a qualified organization. For example:
- If you own a marketing business and you pay a sub-contractor $1,000 to create a website for a 501(c)3 non-profit organization as part of your pro bono services this represents a tangible expense that would qualify as a tax deduction.
- If you agree to provide and distribute yard signs for a charity event, the cost of the yard signs and your travel expenses for distributing them would be deductible on your tax return.
Essentially, you can claim direct expenses for the supplies and tangible items needed to complete the charitable work you are doing (a notable exclusion to this is office and other equipment unless you give it to the charity) and for indirect expenses such as travel. Sorry, taking a trip to yoga class and chugging a soy latte for inspiration don’t count! Indeed, for a deduction to qualify two things must happen. First, the expenses must be considered ordinary and necessary in your current work. Second, the project must be viewed as advertising or as otherwise enhancing your reputation or profile to the extent that it may lead to generating future billable work.
Don’t be Kim Kardashian West, either. In other words, keep your private and public lives separate. That’s because the IRS views pro bono work as part of your business activity distinctly different than volunteer work on your personal time. Pro bono expenses incurred through your business should be itemized on Schedule C of your personal tax return for sole proprietorships and LLCs or on your business return if you operate a partnership, C-Corp or S-Corp. Expenses related to personal volunteer activities are itemized and deducted on Schedule A of your personal return.
Even good deeds can make you look bad to the IRS
It’s true. Doing good can be bad. When you claim deductions for pro bono work the IRS goes on high alert, even if you may never rival the charitable giving of Bill Gates. Too many weenies have taken advantage of illegitimate tax deductions for pro bono work just to lower their taxable income (not you, of course).
To keep freelancers on the straight and narrow, the IRS lays down the law for qualifying expenses, namely:
- The expenses must be for services required to fulfill the agreed upon work you are doing for a non-profit organization; and
- The services must primarily benefit the charity and not you, the taxpayer. For example, if you receive tickets to a charity event after incurring expenses while doing some consulting work for the hosting non-profit organization, you can deduct only the amount of your contribution that is more than the value of the tickets you receive.
When it comes to reporting your tax deductions for pro bono work your mantra must be, “Eat more tacos!” Seriously, your mantra should be “Document, document, document!” If you don’t provide proof of the expenses you incurred to do your good deeds, the IRS will give you the stink eye and flat-out refuse your claim. Heck, your lack of documentation may even trigger an audit. Save all of your receipts and get an official receipt from your charitable client for the value of your deductible services. Be prepared, though. Sometimes even this level of documentation isn’t enough. If in doubt, talk to your trusty tax advisor.
Keep doing the good work that you do!
Pro bono work has many intangible benefits beyond your tax return, like that warm, fuzzy feeling you get from helping others. Don’t let the rather restrictive tax rules stop you. Document any expenses you incur doing good deeds and make the most of your experience when working for your chosen cause or non-profit organization.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelance and self-employed individuals across the country.