Q: A church member who has a business donated numerous hours to rewire the church sanctuary and install new lighting. He billed the church on his company letterhead for items purchased that we reimbursed him for. In addition, he listed total hours spent on the project and the value at an hourly rate. We can acknowledge that he did the work and the numerous hours he donated, but is that deductible for his taxes?
Donated Services Are Not Tax Deductible
You are correct in acknowledging the generous gift of donated labor, and from a donor relations perspective, expressing gratitude is important. However, federal tax law is clear: the value of donated services is not tax deductible.
Why Donated Services Are Not Deductible
While this rule may seem unfair at first, it makes sense when you consider it from two perspectives:
- Economic Substance: If the church had paid the business for the services and the business subsequently donated the same amount to the church, the business would be in the same economic position. In this scenario, the business would have revenue equal to the payment and a corresponding deduction for the charitable contribution, resulting in no net financial effect.
- Practical Considerations: Allowing deductions for donated services would create complex income tax issues. How would the value of services be determined for choir members, Sunday school teachers, nursery workers, musicians, or other volunteers? Documenting time spent and assigning values would be challenging and inconsistent.
Federal Tax Law Logic
Although federal tax law isn’t always straightforward, the rule excluding deductions for donated services makes practical and economic sense in this context. Acknowledging and appreciating these contributions remains vital for donor relations, even if they are not deductible.
How Churches Can Respond
Churches can and should express their gratitude for donated services by providing a written acknowledgment. While this acknowledgment does not hold tax benefits, it strengthens relationships with members who generously contribute their time and skills.
FAQs About Valuing Volunteer Labor
- Are donated services ever tax deductible? No, federal tax law does not allow deductions for the value of donated services.
- Can churches issue a receipt for donated services? Churches may issue a letter of acknowledgment but cannot provide a tax receipt for the value of donated labor.
- What about reimbursed expenses? If a volunteer incurs expenses on behalf of the church and is not reimbursed, those expenses may qualify as a charitable deduction, provided they are properly documented.
- Why does this rule exist? The rule simplifies tax administration and ensures consistency by focusing on tangible contributions rather than subjective valuations of service.
For more detailed guidance on charitable contributions and federal tax laws, visit the IRS website.