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William Perez

Can Freelancers Write off the Value of Time for Charity?

By May 1, 2009

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Freelance professionals often have non-profits and charities as clients. Oftentimes the freelancer will agree to work for free because they believe in the work the non-profit is doing and want to cut them a break on their fees. So the question naturally arises, "Is freelance work done for charity deductible?" (This interesting question was sent to me by a reader via twitter.)

The short answer is no. The IRS explains in Publication 526 that "You cannot deduct the value of your time or services, including... [t]he value of income lost while you work as an unpaid volunteer for a qualified organization."

However, there's an alternative strategy that freelancers might consider. The freelancer could charge the non-profit for their services, and then turn around and make a tax-deductible contribution for the same amount. This strategy has multiple tax consequences, so let's see how the math would work out in one scenario.

Let's assume, for our example, that an freelancer is filing a Schedule C to report her income, and she also itemizes her deductions, and she is in the 25% tax bracket for 2009. She charges the non-profit $1,000 for some web design work, and then separately she donates $1,000 to the charity. In this scenario, our freelancer has increased her self-employment income by $1,000, and so this extra income will increase her self-employment tax by roughly $141. This transaction would increase her deduction for half of the self-employment tax by roughly $70, and would increase her charitable deductions by $1,000. Now her income has increased $1,000, but this will be offset by the charity deduction. So overall, her taxable income is reduced only by the extra $70 deduction for self-employment tax, which would lower her income tax by about $17. Her tax impact: she pays an extra $141 of self-employment tax, but pays $17 less in income taxes, leaving her with $124 in higher taxes overall.

In this scenario, the freelancer does not come out ahead. The charity effectively pays nothing for the services, but the freelancer generates a tax hike for herself because the increase in her self-employment taxes is larger than the tax savings. The freelancer would be better off volunteering her services for free rather than charging a fee, and then turning around and donating the same amount.

However, this scenario may not fit your exact situation. So it would make sense to run your own numbers to see how it would work on your tax return.

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November 11, 2009 at 6:23 pm
(1) Cory says:

I am a web designer looking to deduct the value of a website I recently donated to an organization. From reading the tax code, it seems to me that I CAN deduct the fair market value of the website (not my time/services).

I am going to speak to an accountant, but it seems to me the website that I have donated is Intellectual Property in the form of either Copyright (the design, artistic work) or Software. I’d say it fits more into the former: Section 1221(a)(3) http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001221—-000-.html

Can the author speak to this at all? That is, deducting the value of the product that your time/services produce?

September 2, 2010 at 12:34 pm
(2) Lisa says:

@Cory…did you ever speak to that accountant about deducting the fair market value of the website off your income tax. I think many developers who do charity work like myself would be interested in that. I assumed it was the same…put the price on the value of the site … not the work.

@Mr. Perez did you ever look into the validity of this?

April 27, 2010 at 4:06 pm
(3) Brian says:

Did you ever get a response for the product development?

October 6, 2010 at 12:53 pm
(4) Isa says:

Hello. Still writing and helping people Mr. Perez? If you have an answer for the question that several people are highly interested in knowing (i.e., what Cory posted almost a year ago), can we trouble you to respond or point us to someone who can please? This would be terrific. Thanks.

October 6, 2010 at 7:06 pm
(5) William Perez says:

Cory raised an interesting question. Could it be the case that a person creates a capital asset, such as copyrighted material, and then donates that capital asset to charity, and thereby take a deduction for the fair market value of that item? Cory’s argument points to Code Section 1221(a)(3). That section defines what a capital asset is. Paragraph (a) begins by specifying what a capital asset is not. Paragraph (a)(3) says that self-created copyrighted material and similar types of objects are not capital assets if they are in the possession of the person whose personal efforts created that object. So in this case, Cory would not be eligible to take a charity deduction for donating a self-created copyrighted web site as a capital asset, since it is not a capital asset to Cory.

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