Are in-kind donations from my S-Corp tax-deductible in any way?

Question

I have an S Corp that each year, sponsors a film festival by creating their website for free. In return, they print our logo in their program guide. Last year, I gave them 80 hours of work building their website, in exchange for sponsor status. Is this deductible at all?

I also do web development work for the non-profit organization that holds the film festival throughout the year. I offer them (and my other non-profit clients, in fact) an hourly rate that is discounted at 25% less than my for-profit hourly rate. Is that deductible?

I have been doing this for years and have never deducted any of it. I am preparing my 2011 return right now (had an extension) and thought I might check about this.

Answer 1

You should probably have a tax professional help you with that (generally advisable when doing corporation returns, even if its a small S corp with a single shareholder).

Some of it may be deductible, depending on the tax-exemption status of the recipients. Some may be deductible as business expenses.

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To address Chris's comment:

Generally you can deduct as a business on your 1120S anything that is necessary and ordinary for your business. Charitable deductions flow through to your personal 1040, so Colin's reference to pub 526 is the right place to look at (if it was a C-corp, it might be different).

Advertisement costs is a necessary and ordinary expense for any business, but you need to look at the essence of the transaction. Did you expect the sponsorship to provide you any new clients? Did you anticipate additional exposure to the potential customers? Was the investment (80 hours of your work) similar to the costs of paid advertisement for the same audience? If so - it is probably a business expense. While you can't deduct the time on its own, you can deduct the salary you paid yourself for working on this, materials, attributed depreciation, etc. If you can't justify it as advertisement, then its a donation, and then you cannot deduct it (because you did receive something in return). It might not be allowed as a business expense, and you might be required to consider it as "personal use", i.e.: salary.

Answer 2

The relevant IRS publication is 526, Charitable Contributions. The section titled "Contributions you cannot deduct" begins on page 6; item 4 reads: "The value of your time or services." I read that to mean that, if the website you built were a product, you could deduct its value. I don't understand the legal distinction between goods and services

I originally said that I believe that a website is considered a service. Whether a website is a service or a product appears to be much more controversial that I originally thought. I cannot find a clear answer. I'm told that the IRS has a phone number you can call for rulings on this type of question. I've never had to use it, so I don't know how helpful it is. The best I can come up with is the Instructions for Form 1120s, the table titled "Principal Business Activity Codes," starting on page 39. That table suggests to me that the IRS defines things based on what type of business you are in. Everything I can find in that table that a website could plausibly fall under has the word "service" in its name. I don't really feel like that's a definitive answer, though.

Almost as an afterthought, if you were able to deduct the value of the website, you would have to subtract off whatever the value of the advertisement is. You said that it's not much, but there's probably a simple way of estimating that.