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Backstory:

I am exploring options for a business that offers Software, Platform and Infrastructure as-a-service (SAAS, IAAS and PAAS) and Insurance-Billing services to Ambulance companies, Fire Departments, Schools, and other Charitable and Not-for-profit organizations.

These organizations tend to have strict budgets and often encounter financial impasses that directly affect their ability to maintain subscriptions and use productivity software and services that ultimately impact their businesses and their communities.

We would like to offer discounts to these organizations, but our profit margin is already quite low, and we would essentially be breaking even or paying clients to use our products and services.

Question:

Can such discounts be considered tax-deductible charitable donations?

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Under U.S. federal tax law: In general, a discount on a service provided to a charity is not tax-deductible. There is no deduction for "opportunity cost."

So, for example, if you bill professionally at $100/hour, but you offer service to a qualified charity at $25/hour, you do not get to deduct $75/hour of your time. But you can generally deduct the value of things that you pay for and give to the charity, like travel costs you incur specifically to serve the charity. So if you really are providing SaaS to a qualified charity at a loss then the difference between your cost and what you charge the charity could be deducted as a contribution for tax purposes.

The rules covering tax consequences of charitable contributions are in IRS Publication 526.

And if you find that easy enough, you can dive into 26 U.S.C §170 ... and the IRS's occasional attempts to explain its interpretation of that law with respect to in-kind contributions. Suffice it to say that if you aren't comfortable arguing for your interpretation of the rules then you should defer to a qualified attorney or accountant who is.

  • When you say "charity", does that apply to NPO's and 501(c)(3) as well? For example - could we deduct our operating costs for a Community College or 501(c)(3), or would that apply only to actual Charities? – TaterJuice Jan 23 '18 at 22:49
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    @TaterJuice – The technical term you want for "charity" is "qualified organization." That includes any 501(c)(3), churches, most government entities – the IRS determines who is qualified. You can check whether an organization is qualified at irs.gov/charities-non-profits/exempt-organizations-select-check – feetwet Jan 23 '18 at 23:15

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