US tax deduction for donating a third-party service?
April 11, 2015 10:40 PM Subscribe
We donated a service provided by a third party (i.e. "not us") to a deduction-qualified church. The service has a clearly established price of $150. We didn't pay for the service, because the right to the service was given to us in compensation for the provider botching another instance of the service. Can we claim a deduction on our US federal taxes for the normal price of the service?
Our county offers bounce house rental and face painting, typically for kid's parties, for $150. They completely failed to show up for our kid's party. They didn't charge us for the missed event, and in addition granted us the right to use the service at another time of our choosing free of charge. The relevant birthday had gone by, so we donated the services to a local church school's field day event. Our kid attended the school at the time and used the services, so according to the rules we would need to knock some amount off the deduction for the benefit we obtained, if it qualifies as a deductible contribution at all. That last part is where I'm unsure. The church and its school are eligible for tax deductible donations, the services have a clearly defined price, and we did not perform the services ourselves, which are all points in favor of determining that it was deductible, but since money never left our hands, I remain unsure if we can deduct, say, $145 out of the $150 value. Does anyone know? I scoured the IRS docs, but did not find anything specifically addressing this point.
Our county offers bounce house rental and face painting, typically for kid's parties, for $150. They completely failed to show up for our kid's party. They didn't charge us for the missed event, and in addition granted us the right to use the service at another time of our choosing free of charge. The relevant birthday had gone by, so we donated the services to a local church school's field day event. Our kid attended the school at the time and used the services, so according to the rules we would need to knock some amount off the deduction for the benefit we obtained, if it qualifies as a deductible contribution at all. That last part is where I'm unsure. The church and its school are eligible for tax deductible donations, the services have a clearly defined price, and we did not perform the services ourselves, which are all points in favor of determining that it was deductible, but since money never left our hands, I remain unsure if we can deduct, say, $145 out of the $150 value. Does anyone know? I scoured the IRS docs, but did not find anything specifically addressing this point.
IANAL, but I have done taxes for people.
You held a voucher that didn't have a cash value, but did have value in exchange for a service. By donating that to the school, you are eligible for a tax deduction. (What this is called is a "gift in kind" or "in kind donation".) Ideally, for documentation purposes, you should have asked for and received an invoice from the school. As a non-profit they likely do this all the time already (e.g. landscaper comes and cuts back the shrubbery). All the IRS cares about -- should you ever get audited -- is the invoice, not when or where cash was exchanged.
I concur that taking a percentage off would satisfy the rules you've cited.
That said, unless you have total itemized deductions over a certain amount dependent on filing status, it doesn't count. You need to exceed the standard deduction for your situation (e.g. Married Filing Jointly is $12,400 last year). This is the more important question to determine, because otherwise there's no point in tying yourself in knots over this.
posted by dhartung at 1:35 AM on April 12, 2015 [2 favorites]
You held a voucher that didn't have a cash value, but did have value in exchange for a service. By donating that to the school, you are eligible for a tax deduction. (What this is called is a "gift in kind" or "in kind donation".) Ideally, for documentation purposes, you should have asked for and received an invoice from the school. As a non-profit they likely do this all the time already (e.g. landscaper comes and cuts back the shrubbery). All the IRS cares about -- should you ever get audited -- is the invoice, not when or where cash was exchanged.
I concur that taking a percentage off would satisfy the rules you've cited.
That said, unless you have total itemized deductions over a certain amount dependent on filing status, it doesn't count. You need to exceed the standard deduction for your situation (e.g. Married Filing Jointly is $12,400 last year). This is the more important question to determine, because otherwise there's no point in tying yourself in knots over this.
posted by dhartung at 1:35 AM on April 12, 2015 [2 favorites]
Response by poster: Oh yeah, I wouldn't ask if we weren't already across the itemization threshold.
posted by NortonDC at 6:19 AM on April 12, 2015 [1 favorite]
posted by NortonDC at 6:19 AM on April 12, 2015 [1 favorite]
The part of this transaction that's been neglected so far is your acquisition of the voucher. You can in fact declare the voucher as a deduction. However, since you didn't pay to acquire the voucher, you would have to recognize the income from receiving it for free, which won't make you any better off in the end.
posted by bkpiano at 1:54 PM on April 12, 2015 [2 favorites]
posted by bkpiano at 1:54 PM on April 12, 2015 [2 favorites]
The deductible value is the "fair market value." This IRS publication goes into the details, but basically, the question is what people typically pay for this service. If it's $150, then the value is $150. If the list price is $150 but 95% of people use a coupon and pay $100, then you'd probably be safer using $100.
As to bkpiano's suggestion that you realized income when the company gave you the voucher, that didn't make any sense to me, as gifts are not generally taxable. However, after a little digging, I found that damages for breach of contract are taxable. So it would depend on whether you considered this a gift or damages.
On the other hand, the odds that you will ever be audited are roughly zero, I'd guess that the odds that the auditor would ding you for this if you did get audited are effectively zero, and I'd further guess that the chances that you would be penalized if they did ding you are also - you guessed it - about zero. After all, in Dallas, the IRS doesn't even have enough resources to go after people who owe anything less than $1 million.
In other words (remembering that you can always depend on anonymous advice on the internet from a nonlawyer), just claim it.
posted by Mr.Know-it-some at 6:50 AM on April 13, 2015
As to bkpiano's suggestion that you realized income when the company gave you the voucher, that didn't make any sense to me, as gifts are not generally taxable. However, after a little digging, I found that damages for breach of contract are taxable. So it would depend on whether you considered this a gift or damages.
On the other hand, the odds that you will ever be audited are roughly zero, I'd guess that the odds that the auditor would ding you for this if you did get audited are effectively zero, and I'd further guess that the chances that you would be penalized if they did ding you are also - you guessed it - about zero. After all, in Dallas, the IRS doesn't even have enough resources to go after people who owe anything less than $1 million.
In other words (remembering that you can always depend on anonymous advice on the internet from a nonlawyer), just claim it.
posted by Mr.Know-it-some at 6:50 AM on April 13, 2015
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Imagine someone gave you (for free) a bicycle that you or a nonprofit thrift store could then sell for $150. You donate it to the thrift store. What is the value of the bike? Is it free? Or $150?
posted by aniola at 10:54 PM on April 11, 2015 [1 favorite]