The Nonprofit FAQ
| Can I Get a Tax Deduction if I Charge a Nonprofit Below-Market Prices? |
| Someone asked in CharityLaw (a service of CharityChannel.com)on 4/30/01: Supporters of a non profit organization purchase the building in which it is housed with the intention of renting it to the NPO. If they rent to the NPO at below-market rates, can they treat the difference between market rates and rent as a donation to the NPO for personal income tax purposes? Herbert Hotchkiss of Cleveland, Ohio, replied: The short answer is "no." Below-market rental charges or no rental charges are/is not a charitable contribution deduction to the donor/landlord since the donor/landlord never took into income the amount of rental charges which are not charged to the donee/NPO. A follow-up question was asked: Thanks for the quick response. Let me get this straight:
What happens if the owner/landlord charges full market rent and then immediately turns around and donates all or part of the income back to the NPO/tenant? Is it deductible then? Herbert Hotchkiss answered again: Yes -- the donation is deductible if the donor wants to charge FMV rent and then donate some part of it back to the organization. Why a donor (for tax purposes) would take a larger amount into income in order to get a potentially smaller deduction is hard to understand, unless the donor needs the income. While you did not raise the issue, you also want to make sure that there are no intermediate sanction (if NPO is a public charity -- shouldn't be if truly FMV) or self-dealing issues (if NPO is a private foundation -- can't have rental payments between a disqualified person and the private foundation). For more about intermediate sanctions, see http://www.nonprofits.org/npofaq/18/13.html The same day, someone else asked in CharityTalk (also from CharityChannel.com): I need some clarification on the topic of tax deductions for in-kind donations (I checked out Publication 526 from the IRS and am still confused!). We are building a community garden for people with disabilities, and most of the labor and materials are being donated. Am I correct that the donation of labor/time, i.e. landscape companies that send professional workers to do a specific task such as installing irrigation pipes, cannot be counted as a tax deductible contribution, but that the donation of the pipe can be counted? How about a landscape architect who has spent several months working with a committee to develop a design for the garden? Can he deduct the cost of the design but not the time spent developing it? (For IRS Publication 526, see http://www.irs.gov/pub/irs-pdf/p526.pdf -- PB If I am correct, any suggestions on how/if I should explain this to donors? All donors will be thanked according to the benefits of the sponsorship level in which they have donated, but they may or may not understand rules about deductions. Thought I understood how this worked but when I started reading the regs it didn't make sense that valuable services couldn't be deducted. Michael Wyland answered: The most important thing to remember is that it is emphatically NOT your job or role as a nonprofit organization to advise donors of the deductibility of their time, money, or materials as a charitable contribution. Each donor's tax situation is different, and their tax situation has significant potential bearing on the deductibility of a contribution or gift. Donors should always be advised to seek guidance from THEIR qualified tax preparer, attorney, etc. These businesses can (probably) still deduct their time and materials costs as a business expense, even when it doesn't qualify as a charitable contribution. So, their issue is not whether, but, rather, how, to deduct the expenses. The IRS applies the following principle to deductibility of services: If an activity garners no income, then it is not subject to income tax. Therefore, it (the "value" of the activity should not be deducted from income tax as a charitable deduction -- it had no income "value" to the donor, since no income was received from it. Cash is deductible because cash is subject to tax. Materials on which a fair market value can be established are usually deductible because taxable income is typically used to purchase those materials. Labor, whether laying pipe or serving on a board of directors, is not deductible as a charitable contribution because no income is related to the activity. Direct costs associated with charitable volunteering are often deductible by the volunteer -- mileage, materials, meals, etc., -- with appropriate documentation. Most volunteers don't bother to claim these deductions because: 1) only 1/3 of U.S tax returns are itemized; 2) the hassle associated with documenting volunteer expenses; and/or 3) the (typically) minor amounts spent by most volunteers in the course of volunteering. Your organization can easily set up your recognition levels without regard for the deductibility of the contribution as a charitable expense by the donor. After all, you're recognizing its value to *your organization*, not its tax-reducing value to the donor. In your acknowledgement letters and donation receipts, you can itemize all goods and services received from the donor. DO NOT attempt to estimate a monetary value for these goods and services. Indicate in the acknowledgement letters and receipts that a portion of the contribution MAY qualify as a charitable deduction for federal income tax purposes. Once again, advise donors to check with their tax advisor for potential deductibility. Posted 4/30/01 -- PB |