1

If I offer a discount to a charity for services rendered, I can't claim the discount as a donation for tax purposes, right?

But, can I charge them my full rate, and then donate the money I didn't want back to them? So, if my normal rate is $100/hr, but I wanted to offer the charity a 25% off discount, can I instead charge the charity $100/hr and then write them a check for $25/hr, and claim that check as a tax-deductible donation?

2 Answers 2

2

Sure you can, but it doesn't help. The extra income from charging full price exactly offsets your deduction.

Let's say you work for 10 hours. If you give them a 25% discount, you receive $750 of income (which is taxable to you), and you don't get any deduction for the discount. So your taxable income went up $750.

On the other hand, if you charge them full price and donate back 25%, you receive $1000 in taxable income, and make a donation of $250 which you can deduct. Again, the net effect on your taxable income is that it increased by $750.

So as far as taxes are concerned, there is no real difference between the two. Your scheme doesn't confer any advantage.

What you wish you could do is give them a 25% discount on the services (so you receive income of $750), and deduct that $250 discount. Then the net effect on your taxable income would be an increase of only $500, and so your taxes would be lower than in the other cases. But this is precisely what the IRS won't let you do.

6
  • That raises the question of why the IRS won't let me count a discounted rate for a charity as a tax-deductible donation. If I charge a charity $25/hr less than I charge all my other customers, then one could argue I effectively donated $25/hr.
    – moonman239
    Sep 27, 2021 at 21:22
  • @moonman239: You donated $25/hr worth of services, and services are never deductible. Sep 27, 2021 at 21:25
  • You can either say: "I charged $750". Or you can say "I charged $1000 and donated $250". You can't say "I charged $750 and donated $250" if you have $750 (before tax) in your pocket, unless you actually received $750 and returned $250, leaving you with $500.
    – gnasher729
    Sep 27, 2021 at 22:44
  • Actually, sometimes the full price plus a donation approach would produce more taxation because there are more limits on the charitable deduction than on discounts. For example, a donation to a non-tax exempt entity is not deductible but often a discount will not be reconstructed as full price plus an ineligible deduction.
    – ohwilleke
    Sep 28, 2021 at 4:24
  • @NateEldredge: K, but why is that? Point is, I could've charged them my normal rate, but instead I gave them $25/hr worth of work for free.
    – moonman239
    Sep 28, 2021 at 4:28
5

Doesn't help, does hurt.

Say you charge a discounted rate of $75. That adds $75 to your taxable income.

Say you charge a full rate of $100 and take a $25 charity tax deduction. That nets out to adding $75 to your taxable income, same outcome, except the $25 is in peril, due to the complexities of the tax law. For instance:

  • Charity deductions give no tax benefit at all until you achieve $12,000 of itemized deductions (from donations and mortgage interest, certain state taxes, certain medical expenses etc.) Deem that unfair (we at charities certainly do!) but the fact is, it's because you already get a $12,000 standard deduction as a 'gimme'.*

  • If you're a huge donor (I am on certain years, thanks DAF), you can only deduct 50% of income (with carryforwards, yay). Your donation-back reduces that. Doing it direct adds $75 to AGI ($37.50 to deduction limit), so you can deduct donations of $37.50 to other charities. The donation-back adds $100 to AGI (adding $50 to donation limit) except $25 of that is spoken for by the donation-back, leaving only $25 left.

So I consider the maneuver to be a "lose lose" unless you have some bizarre tax reason for wanting to do that.

Further, such an arrangement is likely to draw scrutiny from the IRS.

By the way, here's an origin concept.

IRS waives taxes on value which you create by your own DIY labor*. Say you mow your own lawn at an annualized cost of $100/year (lawnmower depreciaton and fuel) instead of $1100/year to hire it done. You created $1000 of value "from the sweat of your brow". IRS's policy is not to treat that as income, and thus, not to tax that.

Thus, when you are a craftsman, IRS views the sale of service as the taxable event, not the crafting itself.

Similarly, when you do volunteer work for a charity, "the sweat of your brow" does not create a cash value of interest to the IRS in either direction.

Really, when you are a craftsman offering services, and you do services for a charity, that is considered volunteer labor.




* This used to only be about $5000, but Trump was keen on a postcard-sized tax form, so they folded the adult "personal exemption" into the standard deduction, removing 2 lines on the 1040 form. Meaning most Americans who itemized before, no longer itemized - they didn't have $12,000 of deductions! Schedule A goes away for them (so mission accomplished there)... but so does the tax deductibility of charitable contributions, which was a knife in the heart of charities.

1
  • 1
    As a side note regarding the charitable deduction exemption situation, it also potentially increases the ability of wealthy donors to impact charities since they may now be the primary donors. If Bob's Puppy Orphanage used to be getting 200 $100 donations from small donors, and $20,000 from Duke Cagliostro, if the Duke starts pressuring them to only rescue purebred greyhounds, the small donors may object to all of the other puppies not getting spot, and they account for a good amount of donations. If the Duke is the only or primary donor... one can see why Trump's motives were suspected.
    – SCD
    Sep 28, 2021 at 16:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.