How do tax deductions for donated goods work?
February 24, 2011 2:40 PM   Subscribe

How do non-monetary tax deductible donations work? How is the value of the donated items determined? Is there a special receipt needed? Can any 501(c)(3) provide donors with a tax deductible receipt? Any and all information related to this topic would be appreciated!

I have a little side project that I'd like to turn into a legitimate non profit. The gist is this:

People (so far just friends & family) donate their old electronics to me, usually after they upgrade to the latest and greatest (think iPhones). This relieves them of the ebay/craigslist hassles, keeps the device from gathering dust in a drawer and prevents it from getting tossed in a landfill.
I then give these devices away for free, in exchange for local community service hours. The goal is to encourage (and hopefully inspire) people to help out one another as well as provide a good home for these previous generation electronics. All service needs to involve some interaction with other people. I do this to hopefully remind people that in the end, no matter what material objects we have, what our beliefs are or where we live, we're all just human.

So far, I've given away an original 5gb iPod, iPhone 3g and 15" Macbook Pro battery in exchange for ~40 hours worth of community service (Habitat for Humanity, Special Olympics and soup kitchen).

I currently have 3 more iPhones (one 1g, two 3g) and 2 Apple Airports to give away in the manner I described above, as well as verbal arrangements to pick up a Blackberry, Playstion2, Xbox and maybe even a PS3 and 46" LCD TV. Ideally, all of these folks would get receipts from my 501(c)(3), this is where my questions above come into play.

Thanks for taking the time to answer my questions!
posted by covercash to Law & Government (11 answers total) 1 user marked this as a favorite
Obviously I'm not your lawyer, or a lawyer at all, nor an accountant, nor a tax expert. This does not constitute legal or tax advice -- I'm just explaining what I've experienced. This is likely to be a complicated endeavor, and I really think you should get professional advice from an expert before starting.

That being said, whenever we donate to Goodwill or something like that, they just give us a blank "receipt" to fill out with the items and estimated values ourselves. I've assumed that they don't want to be in the position of determining the value, so if it's wrong they aren't liable. I always go extremely conservative on the values (i.e. usually a tiny fraction of what the item originally cost, like what it might sell for at a garage sale).
posted by sharding at 2:49 PM on February 24, 2011

Hmmm, all caveats in place, this is how I imagine it might work.

You file for 501(c)(3) status. You then create in-kind donation receipts you can give to people when they donate items to you. There's no special receipt. You can appraise the item and list the ostensible monetary value on the receipt. This is the value of their in-kind gift which they can then use for their taxes or whatever. Just give the item the highest value it might fetch on ebay, or whatever. The receipt should include your EIN number and a statement of the sort "donor has received no tangible benefits or products in exchange for this donation." (IANAL/A)

It's more complicated in the second transaction. There is a national standard for the per hour rate of a volunteer hour (it's around $20/hr). Now, this doesn't mean that the hours you get in return need necessarily equal the appraised value of the item you're giving away. On your budget, you can list the electronic devices as an expense and an in-kind revenue.

The volunteer hours is a little weird because they aren't volunteering for you, exactly, so that wouldn't go on your balance sheet since you're sort of just acting as the middle man, unless you listed them somehow as being hours donated to your org which you in turn donate to a third party - I have no idea what the accounting/legal status of such a transaction might be.
posted by Lutoslawski at 3:00 PM on February 24, 2011

The value of donated items (called "gifts-in-kind") is determined by the donor. When a donor donates an item to a nonprofit organization, the organization gives them a receipt which describes, in words, the item(s) donated. The donor must them substantiate the value in his or her own taxes. The nonprofit cannot arbitrarily assign a value to the item. More on the topic of tax related issues with gifts-in-kind can be found at IRS Pub 526. (As a sidenote, if the donor values the item at over $5000, they need it appraised, too. But I don't think any of your consumer electronics qualify.)

I really have no idea what you are describing in the latter part of your question, when you say that you give away the electronics "for free" "in exchange for community service hours." Does this mean that you then give away the electronic items to random people in exchange for their pledge to perform community service at nonprofit organizations? If that is the case, there is no charitable gift made to the nonprofit.

If you are yourself a nonprofit, you could theoretically give tax receipts to the donors of the electronics, but since the value of these used electronics is zero - after all, you are giving them away - they're not going to get a tax deduction as the result of the donation. "But wait!" you say. "I'm not giving away the electronics for free, I'm giving them away in exchange for a promise of volunteer hours. " Those volunteer hours have a value of zero. Sorry.

If you don't follow this, please comment on this thread with a better description of the exact transaction, and I will follow up with the applicable law.
posted by juniperesque at 3:00 PM on February 24, 2011 [1 favorite]

Lutoslawski: "You can appraise the item and list the ostensible monetary value on the receipt. This is the value of their in-kind gift which they can then use for their taxes or whatever. Just give the item the highest value it might fetch on ebay, or whatever. "

This is wrong, sorry. A nonprofit cannot provide a monetary value of an in-kind gift on a receipt. It is on the donor 100%.
posted by juniperesque at 3:01 PM on February 24, 2011


Are you saying that your organization is an incorporated and registered 501(c)(3)? That's what it sounds like you mean when you say "my 501(c)(3)." I am kind of concerned you're using "501(c)(3)" to mean "non-profit activities" instead of referring to the status of registration and approval of 501(c)(3)s.

Yes, a 501(c)(3) can give receipts to donors who give donations. This procedure should be relatively straightforward, and I think that others have already pointed you towards the right procedures for doing that. All the stuff about what you do with those items is not relevant to that process (except in a few cases where the IRS now requires that the value assigned to to the donation is based on what the donee can sell it for, but I think that is only for large ticket items) (although it might be relevant for your 501(c)(3) status.

"If you are yourself a nonprofit, you could theoretically give tax receipts to the donors of the electronics, but since the value of these used electronics is zero - after all, you are giving them away - they're not going to get a tax deduction as the result of the donation. "

Of course this is not true. Donated items are valued at fair market value - their value doesn't change because you give them away. There is a wide variety of information available on this. It is generally true that volunteer services are not tax-deductible, although a person may be able to deduct for their related expenses (but maybe not in your case, because they're getting something of value in return).
posted by iknowizbirfmark at 3:18 PM on February 24, 2011

I think that I understand now that you are considering creating a charity and, I assume, potentially filing for 501(c)(3) status. Unfortunately, I think that this is far more involved that you realize, in part because it is so easily able to be abused. You might try to contact an existing charity to see if you can develop your program with them - it sounds like a really neat idea, but the recordkeeping and filing requirements for 501(c)(3) are substantial, costly and time-consuming.
posted by iknowizbirfmark at 3:21 PM on February 24, 2011

Sorry for the confusion. Right now I run this from home, there is nothing official about it. My friends and family give me their old items and I then find people willing to do local volunteer work in exchange for these items (usually on craigslist or through referrals).

I obviously need to find a lawyer to handle these questions, but I asked here to hopefully get a rough idea of the road ahead of me.
posted by covercash at 3:31 PM on February 24, 2011

OP, your profile says you're in Philly. That's great--there are a number of large law firms in Philly that surely have pro bono programs that can help with your 501(c)(3) application (Form 1023). Best first step might be to contact someone at the Philly VLA to see whether they or another sponsoring clearinghouse might put you into contact with the appropriate people at different firms to move forward. Here's a link.
posted by Admiral Haddock at 3:38 PM on February 24, 2011

You may not be surprised to learn that the IRS has a publication which addresses this. It's complicated, and not only is initially applying for the status complicated, there are ongoing record-keeping and reporting responsibilities which would far, far outweigh the benefits, if you're only looking at offering your donors a tax break (I'm guessing here, but I have worked for a few nonprofits, so I have an idea).

Are you liable for any taxes as a result of these activities? Are you operating as a sole proprietorship? Have you incorporated? You might also see if SCORE (the Service Corps Of Retired Executives) has someone who can talk to you about this--they've been incredibly, incredibly helpful to the businesses I've worked for.
posted by pullayup at 3:58 PM on February 24, 2011

You can also use TurboTax's itsDeductible website to determine the value of items.
posted by jchaw at 4:26 PM on February 24, 2011

Volunteering is giving your time to serve a nonprofit organization for nothing in return. Legally, per the IRS, you can deduct your own costs associated with volunteering from your taxes (e.g. mileage to get to and from sites, a ream of paper for writing thank you letters, the 40 cans of soup you buy with your own money to dole out at the soup kitchen). But these folks who are getting your consumer electronics are enjoying the quid pro quo that precludes this from being legally - at least by IRS standards - volunteering.

Please, if you are going to consider trying to incorporate your nonprofit idea, consider separating things to lose the quid pro quo. For example, collect consumer electronics, sell them, and donate the proceeds to nonprofits. Secondarily, help connect potential volunteers with nonprofits that need them. Bear in mind that tons of nonprofits do this already - that won't affect your ability to get incorporated, but it might affect your interest in reinventing the wheel.

For the record, IANAL, but I am a professional in the field of nonprofit risk management.
posted by juniperesque at 5:55 PM on February 24, 2011

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