You just donated a portrait session worth $700 to the Red Cross. The donated session included $150 worth of prints that you generously paid for yourself.
When it comes to donations that involve service costs, things can get a little confusing. Your instinct tells you that you should be able to deduct the full $700 since that’s how much you would have been paid by any other client. Unfortunately, that’s not the case.
Any donations of your time, whether it’s to a 501(c)3 charitable organization or not, is not deductible as a business expense or personal tax deduction. It’s a huge bummer, but we all know there are people out there who would take advantage of the system if they were allowed to deduct their time by overestimating or overcharging what their time was worth. To check whether or not a company falls into the category of 501(c)3, check out this helpful page from the IRS.
What kind of charitable contributions can I deduct on my taxes?
There’s good news though! You can deduct any out-of-pocket expenses related to the session. Let’s say you loaded up your car and drove 10 miles to the session site. Your assistant also joined you and you paid them $50 to help out for the afternoon. As mentioned before, you also paid $150 for the prints after the session. All of these expenses are deductible.
Any miles driven for charitable purposes can be deducted at $0.14 per mile (2018 rate) on your personal itemized deductions form (Schedule A). This is a significant drop from the business mileage rate, but if a lot of driving is involved, this can add up, so be sure to track it.
When you paid your assistant $50, even though it was for a service, you can deduct that amount as a charitable donation. You’ve had an out-of-pocket expense paid to another party, so it qualifies. Similarly, when you paid for the prints yourself, it was another out-of-pocket expense that can be deducted.
Now you ask yourself, where do I deduct these expenses? The answer is probably not what you’d guess. For sole proprietors and single-member LLCs, the deduction isn’t lumped together with your other business expenses. It goes on your personal Itemized Deduction page of your tax return. To see if you use this form, check your previous tax return for Schedule A. If it’s not in there, that means you get a standardized amount for your personal deduction and your donation won’t affect your tax return.
Last, but not least, remember to always save any documentation related to your donation. In addition to receipts, try to request a donation receipt that shows the total amount of goods donated. In the case of an audit, you’ll need to be able to easily access these documents.