Discounts and Tax Breaks
April 27, 2023 5:57 PM
My one-lady LLC provides services for both corporate and non-profit organizations, but, out of the goodness of my heart, I have been giving non-profit orgs a 25% discount on services provided, as many of them have limited budgets. Does this 25% discount technically count as an in-kind donation to the non-profit org and when I file taxes in the future, can I deduct the 25% that I would have charged them from my business income?
well...you only pay taxes on the actual money you receive (or money you expect to receive, if you're not doing cash accounting). Since you don't expect to receive the full 100%, you don't get taxed on whatever is leftover of the 75% after your expenses. So you don't deduct the 25% when you didn't count it as income to start with.
This is rough and may not capture all possible details and I'm not an accountant. I do have a one-person LLC that I pay taxes on, and have given all sorts of discounts, and then don't get taxed on the "full price" that I didn't actually charge.
posted by cacao at 6:55 PM on April 27, 2023
This is rough and may not capture all possible details and I'm not an accountant. I do have a one-person LLC that I pay taxes on, and have given all sorts of discounts, and then don't get taxed on the "full price" that I didn't actually charge.
posted by cacao at 6:55 PM on April 27, 2023
Ask your CPA of course, but mine (for a one-dude NY LLC taxed as an individual) says no. In general you cannot deduct in-kind donations of services.
I'm sure there's a logical reason for why or why not [on preview, cacao says it nicely], but given the wild crap that real estate folks can do with their taxes, it seems silly to try to rationalize any part of tax law.
posted by hovey at 7:00 PM on April 27, 2023
I'm sure there's a logical reason for why or why not [on preview, cacao says it nicely], but given the wild crap that real estate folks can do with their taxes, it seems silly to try to rationalize any part of tax law.
posted by hovey at 7:00 PM on April 27, 2023
You would be getting gift letters from the charities because they would be accounting for the discount as an-kind donation in their books. The money you write off has to balance out with recorded donations on their end. Otherwise, you could just declare "my going rate is one jillion zillion dollars, but for you, it's $1." and then write off "one jillion zillion dollars minus $1" on your taxes. Or, inversely, charities could just send out "This person donated one jillion zillion dollars!" to anyone who asked.
posted by Back At It Again At Krispy Kreme at 7:07 PM on April 27, 2023
posted by Back At It Again At Krispy Kreme at 7:07 PM on April 27, 2023
I own my own business and my understanding is the same as cacao's answer.
posted by rsclark at 7:20 PM on April 27, 2023
posted by rsclark at 7:20 PM on April 27, 2023
You are asking whether you can deduct the 25% twice. You can't.
If your normal rate is $100/hour, and you only charge them $75/hour then you get paid $75/hour and you pay taxes on $75/hour. You don't get to deduct the $25/hour you didn't get paid from the $75/hour that you did get paid. You don't get to pretend they paid you $50/hour.
Now, if you they paid you $100/hour and you gave them back $25/hour, you might have an argument for calling that $25 a donation. Ask your accountant, but I'm pretty sure you're better off just charging them $75 to begin with.
posted by Winnie the Proust at 7:57 PM on April 27, 2023
If your normal rate is $100/hour, and you only charge them $75/hour then you get paid $75/hour and you pay taxes on $75/hour. You don't get to deduct the $25/hour you didn't get paid from the $75/hour that you did get paid. You don't get to pretend they paid you $50/hour.
Now, if you they paid you $100/hour and you gave them back $25/hour, you might have an argument for calling that $25 a donation. Ask your accountant, but I'm pretty sure you're better off just charging them $75 to begin with.
posted by Winnie the Proust at 7:57 PM on April 27, 2023
Short answer: Nope.
Addendum: I know I am not the only nonprofit fundraiser who has wondered at some late hour if we could do something like this to make our numbers/ fundraising capacity look stronger in a weak year. This idea falls apart when you look at FASB.
Caveat: I have heard of large corporations bundling up the difference between their going rate and their charity rate for services combined with their (relatively small) corporate philanthropic grants plus their payout of matching gifts and other "nice things" and reporting out a nice huge round figure of their "total community commitment" or some such euphemism, but a) that's marketing, not a representation of actual accounting categories and b) they have an entire in-house legal team scrutinizing what they can get away with doing and saying for PR purposes..
posted by desuetude at 11:53 PM on April 27, 2023
Addendum: I know I am not the only nonprofit fundraiser who has wondered at some late hour if we could do something like this to make our numbers/ fundraising capacity look stronger in a weak year. This idea falls apart when you look at FASB.
Caveat: I have heard of large corporations bundling up the difference between their going rate and their charity rate for services combined with their (relatively small) corporate philanthropic grants plus their payout of matching gifts and other "nice things" and reporting out a nice huge round figure of their "total community commitment" or some such euphemism, but a) that's marketing, not a representation of actual accounting categories and b) they have an entire in-house legal team scrutinizing what they can get away with doing and saying for PR purposes..
posted by desuetude at 11:53 PM on April 27, 2023
Yeah, seconding cacao and Winnie the Proust. This doesn't work.
IANAAcountant and I don't get deep into the accounting part of the small business I work for, but we have a lot of non-profit clients, and multiple clients have floated the idea that we could reduce what they actually pay us by giving them a discount and then writing off the difference between our "normal" rate and what we bill them as an in kind donation. That way we get the "full value" of our services and they write us a smaller check. IOW, they're suggesting we do what you're thinking of doing.
As far as I know, we've been told by multiple accountants that the only 100% legitimate aboveboard no-red-flags way to do something like this would be for us to charge them whatever we charge them, and then we would turn around and write them an entirely separate check as a donation. That way there's a clear unambiguous paper trail - we've got a record of income from the non-profit we pay taxes on, and we've got a record of us donating to the non-profit, and nothing that suggests that we're trying to pull a fast one, we are officially just donating because we think they're a good cause. And then at tax time we've reduced our taxable income by donating money to non-profits.
In our case the problem with that is we'd need to do it a lot for a lot of clients, and it's just not really worth the person-hours to organize and keep track of it, and of course we can't pay staff and contractors and the electric bill and liability insurance and etc etc etc with in-kind donations, we need the actual money in our bank account.
So yeah, you just bill your non-profit clients 25% less, pay taxes on that income, and the "business value" of that 25% discount is that you can feel free to actually tell your non-profit clients that you're charging them a lower rate, and get repeat business from them and quite possibly more business as the non-profits in your area or of similar focus spread the word that you charge less for non-profit clients.
posted by soundguy99 at 5:39 AM on April 28, 2023
IANAAcountant and I don't get deep into the accounting part of the small business I work for, but we have a lot of non-profit clients, and multiple clients have floated the idea that we could reduce what they actually pay us by giving them a discount and then writing off the difference between our "normal" rate and what we bill them as an in kind donation. That way we get the "full value" of our services and they write us a smaller check. IOW, they're suggesting we do what you're thinking of doing.
As far as I know, we've been told by multiple accountants that the only 100% legitimate aboveboard no-red-flags way to do something like this would be for us to charge them whatever we charge them, and then we would turn around and write them an entirely separate check as a donation. That way there's a clear unambiguous paper trail - we've got a record of income from the non-profit we pay taxes on, and we've got a record of us donating to the non-profit, and nothing that suggests that we're trying to pull a fast one, we are officially just donating because we think they're a good cause. And then at tax time we've reduced our taxable income by donating money to non-profits.
In our case the problem with that is we'd need to do it a lot for a lot of clients, and it's just not really worth the person-hours to organize and keep track of it, and of course we can't pay staff and contractors and the electric bill and liability insurance and etc etc etc with in-kind donations, we need the actual money in our bank account.
So yeah, you just bill your non-profit clients 25% less, pay taxes on that income, and the "business value" of that 25% discount is that you can feel free to actually tell your non-profit clients that you're charging them a lower rate, and get repeat business from them and quite possibly more business as the non-profits in your area or of similar focus spread the word that you charge less for non-profit clients.
posted by soundguy99 at 5:39 AM on April 28, 2023
I also work in nonprofit fundraising; gifts-in-kind are designed to be gifts of physical objects ("materials or long-lived assets" is the technical wording) (a computer, a dental chair, a copier) and not service gifts.
posted by anastasiav at 9:46 AM on April 28, 2023
posted by anastasiav at 9:46 AM on April 28, 2023
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posted by rrrrrrrrrt at 6:45 PM on April 27, 2023