Deductions: Volunteer Time, Honorariums & Gala Tickets

Dear Kim,

Our tiny nonprofit has an accountant who has been doing our bookkeeping for free. I told her she should deduct the value of her time from her taxes and, to my great surprise, she told me that is not legal. Why would that be? She could have made money during that time from a paying client.

~Time is Money

Dear Time,

First of all, let’s be clear that time is NOT money. Time is time. It is our most precious non-renewable resource. We all have the same amount of time—24 hours in our day, but we have vastly unequal amounts of money. Few people have trouble asking for time, (“Maria, will you come to a meeting on Wed at 5?”) whereas most of us have trouble asking for money. And the reason you cannot deduct the value of your volunteer time from your taxes is that the IRS doesn’t care how much of your time you give away or how much of your time your work for pay. They care about how much money you make, and whether you have paid your fair share of it in taxes. You are correct that your accountant could sell her time to someone else, but the same is true of any volunteer. Whatever time someone spends with you doing work for free could have been spent doing work for pay. The fact that she uses her expertise for free is a very nice gift from her—a gift of time!

~Kim

Dear Kim,

I recently gave a speech for which I was to be paid an honorarium. I asked that the check be made out to a nonprofit I am involved in, and that happened. I got a lovely thank you note for doing that. But then I wanted to deduct that gift from my taxes and asked the nonprofit to give me a tax receipt but they said no. I am miffed! They would not have gotten that money except for me.

~What gives?

Dear Gives,

You were very generous to forgo your honorarium and have it sent to a nonprofit instead, but since the money did not come from you, they can’t thank you for giving it to them. You didn’t give that money yourself and we can only get tax receipts for money we actually give. I know you don’t mean it like this, but basically this is what you are doing: you don’t declare that income because you didn’t get it, but you want to declare a gift that you didn’t give. Don’t be miffed: be pleased that the nonprofit understands and abides by the law.

~Kim

Dear Kim,

I recently met with a donor who came to our gala. The tickets are $75 but the fair market value is $55 so the donation is only $20. The donor was really mad that the event cost so much. I tried to explain that we have sponsors to offset our costs and so we make more than $20 on each ticket, but he just didn’t understand. I couldn’t really explain it either and I think I damaged our relationship. What should I do?

~Stumbling Nitwit

Dear SN,

Don’t be so hard on yourself. You stumbled through an explanation in a not satisfactory way but that doesn’t make you a nitwit. The concept of fair market value is not easy to explain to donors who are thinking, “I got this great dinner and the whole thing is a write-off.” And then thinking, “I paid all this money and most of it went to the food and hotel.” The donor probably feels a little like a stumbling nitwit himself.

In those situations, the best thing to do is apologize that you weren’t clear in the beginning with the donors but you hope he had a good time and knows that the money he paid for the ticket helps the cause he cares about. Then explain that by law, a donor cannot receive any goods or services for a donation. (This is at the bottom of every thank you letter.) When goods or services are received, the value of those must be deducted from the gift. This is to prevent egregious deductions, like people who go to a nonprofit auction, successfully bid on a very expensive item and then want to deduct the cost of it from their income taxes. This is an abuse of the tax deduction and is, appropriately, illegal.

As to what you should do with this donor, my bet is he will get over it pretty fast. Even if he could have taken the whole $75 as a deduction, the value of that on his taxes is minimal. Invite him to your office or to something related to your mission that doesn’t cost money. All relationships have bumps, but they are not permanent scars.

Good luck,  

~Kim