Q&A: Valuing Volunteer Labor

Are donated services deductible?

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?

You are absolutely right that you may (and, from a donor relations perspective, probably should) express the church’s gratitude for the generous gift of donated labor in the form of electrical services. As for the business, it is not entitled to an income tax deduction for donated services. Federal tax law is very clear that the value of donated services is not tax deductible.

While at first the law may seem unfair, if you look at it from a couple of different perspectives, it actually does make sense. First, think about the economic substance of the transaction. If the church had paid the business for the services and the business then turned around and donated the same amount of money to the church, the business would be in the same economic position as if it had simply donated the services. The difference, however, in this example, is that the business would have revenue for the amount paid by the church and a deduction for the charitable contribution (assuming it qualifies), the net effect of which is zero on the bottom lineā€”the same as the effect of simply donating the services.

Additionally, think about the income tax issues that would arise if the value of donated services were deductible. Would choir members, Sunday school teachers, volunteer nursery workers, volunteer musicians, scout troop leaders, and other volunteers be entitled to deductions? How would you value them? How would you document the time actually spent? This example also illustrates why the law is what it is.

Federal tax law is not always the most logical set of rules. In the case of donated services, however, the rules actually do make some sense.

For more information on tax laws that affect churches, see Richard Hammar’s annual Church & Clergy Tax Guide, available on ChurchLawAndTaxStore.com.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

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