Tax Tips Blog

Dennis asks:I am composer, and I rent out the score and instrumental parts from time to time. I have some special way of reporting the rental income of intellectual property on my Schedule C. I’m not sure exactly how and where, because Turbotax always takes care of it. This year I donated the rental of two of my pieces to a local small legitimate 501c3 non-profit. I usually get a thousand dollars per rental, so I’d like to write it off. Can I just write off my usual retail rental price like that of the in-kind contribution, which would give me a two thousand dollar charitable contribution? Or is there something different I have to do? And by the way, I have a letter of thanks from them that mentions the value of the rentals, and I can substantiate the fees. Many thanks for any advice.

My response: The tax law does not allow you to write off the value of your time that you donate to a charity. Thus, being the original creator of your intellectual property, your property’s tax basis is zero.

If your tax basis is zero your donation value is zero.

As a consolation, I am sure that you received full credit from the charity acknowledging your work and donation. This credit is advertising costs that you did not have to pay for.

Best wishes,

Gina

Ryan asks: I’m retired with a federal pension and social security. Financially I do not need to work, but I miss it. I really enjoyed working, but I don’t want the pressure of a full time job anymore. I’ve been told that if I set up a foundation, I can freelance, doing the same work I use to do, only instead of having people pay me, ask them to donate the money to my own foundation. I’ll get to continue to do the work that I enjoy. Technically I will not have any earnings, so I won’t have to pay any taxes on the money I earn. I will get to direct 100% of my earnings to charities of my choosing. And everyone who hires me will get a tax write-off, so it will work great for everyone. My question is, how do I go about setting up this foundation?

My response:Hello Ryan!  By any chance does your idea sound a little bit too good to be true? Well it is.

In the situation you described, you would be providing your services as an independent contractor (note how many times you referred to the income as “earnings” - that should have been a hint that it was taxable).

As far as tax law is concerned, you are not allowed to “assign income”; thus anything you earn are your earnings to report. In the case you described above you would be reporting your earnings as a sole proprietor and you will owe federal taxes and self-employment taxes on any net income from your activity. If you are younger than full retirement age as far as social security is concerned it may affect your social security benefits.

The fact that you wish to donate your earnings to charity, whether that be your own foundation or another charity, is irrelevant; thus, under the circumstances that you described I don’t think you would like to set up a foundation. If one were to want to set up a foundation, a qualified attorney can help you do so.

Best wishes,

Gina

Dale from Ohio asks: I found your blog from searching google and I was wondering if you could help me. I have a client that is having a difficult time paying me. I know they have the ability to pay me, but actually receiving payment for my services is a problem. This is a nonprofit organization that I have some fondness for. Could I ask for a receipt for the work as a charitable donation? I do have documentation as to what my time is worth from similar work and receipts for my travel and other out of pocket costs that I incurred.

My response: Hello Dale! If you do not have a tax advisor (and since you’re searching the internet for an answer to this question, I’m guessing you don’t), I highly recommend that you find one as soon as possible. It sounds to me as if you have a business, since you used the word, “client”. If this nonprofit organization is your client, then you must have (or should have) recorded your “travel and other out of pocket costs” already. And as I’m sure you’ve heard before you are not allowed to deduct the time or services that you donate to a charity. In an attempt to help you with your problem I will share some personal experience. I too have found that some charities, even those with plenty of cash, seem to think everything they receive should be a donation. For that reason, I now include a check for a donation with my bill for the work I have done for the charity. I request that they do not deposit my donation until they have paid my fee. You may want to consider this option, but you should be aware that you will have to record the full amount of the income you receive and you may not be able to deduct any of the donation that you are giving. You tax professional will be able to help you figure out if this is a viable or beneficial option. Best wishes, Gina

Randy inquires: I realize with the passage of the Pension Act of 2006 a taxpayer can make a contribution directly to charity, have it excluded from their taxable income, included in their required minimum distributions, and not deductible on Schedule A. Is there an exception to the deductibility on Schedule for taxpayers with an IRA which has been completely funded with non-deductible contributions?

I respond:Are you over 70-1/2 years old? Is the charity you wish to contribute to a 501(c)(3)? Do you wish to contribute $100,000 or less? Do you have any other fully deductible IRAs that you can use for this contribution? How much of your IRA is taxable earnings? As you can see this seemingly simple question, has a lot of follow-up questions which should be answered in order to make the best decision possible. You may be better off cashing out your IRA, pay the tax on the earnings and then make a charitable contribution and get the full benefit of the deduction. Then again, the distribution will be counted toward the amount you have to withdrawal and the withdrawal is not taxable to you. This will lower your AGI, which may help with your 2007 Medicare payments, which are scheduled to increase. According to IR 2006-192, which was released December 14, 2006, the situation that you are referring to (non-deductible IRA) states that the distribution/contribution is first taken out of your earnings (taxable funds) and the remainder from your non-deductible contributions. This ruling is silent as to whether or not the non-taxable distribution/contribution can then be deducted on Schedule A. No matter what your situation, if you plan on utilizing this tax benefit please consult your tax professional for appropriate guidance.