by Bob Rywick
The President has recently emphasized the need for contributing our services as part of the national fight against terrorism. The purpose of this column is to point out the key tax factors that are involved in doing volunteer work for a charity.
No deduction for value of services performed for charity. No deduction is allowed for the value of services performed for a charity. Thus, no deduction is allowed for:
- Forgiving a charity's obligation to pay salary.
Observation: This basically puts the individual forgiving the obligation in the same position as an individual who receives salary from a charity and then contributes it back. It's possible that, in some situations, the charity and the donor-individual both would be better off if payment is forgiven instead of being donated back to the charity after it is received, e.g., where FICA taxes would otherwise be payable by both the charity and the individual on the salary.
. . . for free legal work that resulted in the production of legal documents, at least where the attorney producing the documents did not maintain physical ownership of them after they were created. See below, however, for where services may be deductible where they are used to increase the value of property that is donated. like:
- a donation of blood;
- free advertising space;
- free broadcast time.
Effect of merging services with property. In some cases, the courts have held that the total value of property contributed to a charity is deductible even though the donor performed services that increased the value of the property. For example, the Tax Court allowed a deduction for the full value of a cataract machine and a heart-lung machine contributed to hospitals by the inventor. The Tax Court denied the Internal Revenue Service's claim that the inventor had only donated his services, saying that the services performed "coalesced in the resultant property interest." (Cupler II, John A., (1975) 64 TC 946).The Tax Court also found the full value of tapes of commercially recorded opera performances and radio broadcasts to be deductible. The Tax Court rejected the service's claim that only the value of blank tapes should have been deductible since the recordings resulted from the donor's services (Orchard, Robert, (1975) TC Memo 1975-31).
Similarly, the Tax Court said that the value of movies (Holmes, John, (1971) 57 TC 430) and essays (Goss, Bernard, (1973) 59 TC 594) contributed to a charity by their producer were deductible contributions of property and not nondeductible contributions of services where the producer had physical possession of them for an unspecified period of time.
Caution: The ability to increase a charitable deduction of property as a result of services performed by the donor is severely limited by changes made to the Internal Revenue Code after the Tax Court decisions mentioned above were made. Thus, a deduction for the value of appreciated property in excess of the property's basis is not allowed to the extent that:
- The gain would be taxed as ordinary income or short-term capital gain if the property were sold. Ordinary income property includes:
(a) inventory or other property held for sale to customers;
(b) Section 306 stock;
(c) art works, letters, memoranda and similar property created by the donor; and,
(d) property used in a trade or business but only to the extent gain on the sale would have been recognized as ordinary income. - Long-term capital gain would be recognized if tangible personal property were sold instead of contributed to a charity, but only if the charity's use of the property is for a purpose or function other than what it was organized to do. This rule is designed to prevent the donor from getting a deduction for the appreciation in value of tangible personal property that the charity is expected to sell.
- Long-term capital gain would be recognized if property contributed to a private foundation had been sold instead. This rule does not apply to the extent that income is recognized by the donor as a result of the contribution or if the contributed property is qualified appreciated stock.
Observation: The full value of the cataract and heart-lung machines in Cupler II, above, could probably still be deducted under current law if the donor held the machines for the long-term capital holding period before making the donation. The deduction of the full value would probably not be allowed for the recordings in Orchard, the movies in Holmes, or the essays in Goss.Observation: The full value of a gift of property to a charity that is to be used for that charity's primary purpose should be deductible as long as the property isn't ordinary income property described above.
Example: Your client buys a run-down building for $100,000, which he intends to give as a gift to a local youth center to be used as its club house. He spends $50,000 and a great deal of his time to fix the building up. After holding the building for more than a year, he contributes it to the youth center when its fair market value is $250,000. He should be able to deduct the full value of the building even though about $100,000 of its increased value is due to the services that he performed in fixing the building up.
Deductibility of out-of-pocket costs incurred in performing services for a charity. Even if no tax deduction is allowed for the value of services that are performed for a charity, some deductions may be allowed for out-of-pocket costs that are incurred while performing the services (subject to the deduction limit that generally applies to charitable contributions).
For example, a deduction is allowed for out-of-pocket transportation expenses necessarily incurred in contributing services to a charity. Those expenses would include non-reimbursed expenses directly attributable to the use of a car while performing services for a charity (e.g., the cost of gas and oil). Instead of deducting actual expenses incurred, a taxpayer may deduct a flat 14 cents a mile for the charitable use of a car. In either event, parking fees and tolls also may be deducted.
To deduct actual expenses, your client must keep track of the expenses, the services performed, when they were performed and the organization for which they were performed. Your client should retain receipts, canceled checks and other reliable written records relating to the services and expenses. If the charitable standard mileage rate is used instead of the actual expense method, your client's records must show the number of miles driven for charitable purposes.
No charitable deduction is allowed for a contribution of $250 or more unless your client substantiates the contribution by a written acknowledgment from the charitable organization. The acknowledgment generally must include the amount of cash and a description of any property contributed. This may present a problem for out-of-pocket expenses incurred in the course of providing charitable services because the charitable organization would not know how much those expenses were. However, your client can satisfy this requirement if he has adequate records to substantiate the amount of the expenditures and obtains a statement from the organization that contains:
- a description of the services provided;
- the date the services were provided; and,
- a statement of whether the organization provided any goods or services in return (and, if it did, a description and good-faith estimate of the value of those goods or services). Your client must get this statement by the time the tax return for the year of the contribution is filed.
Note that away-from-home travel expenses while performing services for a charity aren't deductible if there's a significant element of personal pleasure associated with the travel. Also, if the services for a charity involve lobbying activities, no deduction is permitted.
