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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.

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I don't believe that discounts are deductible at all. If you charged a non-profit corporation $100 (say) and declared that as income and then turned around and made a charitable donation of $25, that $25 is a charitable donation against the $100 income. If you charged them $75 to begin with and declared only $75 as income, you cannot deduct $25 from the $75 income! –  Dilip Sarwate Oct 9 '12 at 20:54
    
Yes, that makes sense to me. I read some more and I think discounts are deductible, but either I could report $100/hour income and then report a $25 donation, or I could report $75/hour income -- the result would be the same, and the latter is simpler. –  jessica Oct 10 '12 at 3:28

2 Answers 2

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.


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.

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Cheers, I would love to hire a tax professional, but am completely broke and trying to do it on my own this year. –  jessica Oct 9 '12 at 19:15
    
I was thinking I could book it as an advertising expense, but I didn't spend cash, so I'm not sure how the law would apply to in-kind trade for advertising, though trust me, the value of the advertising I receive is far less than the value of the service I'm providing. I'm guessing I can't deduct. –  jessica Oct 9 '12 at 19:42
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Picasso walks in to a charity auction, sketches the historic building it's held in (I know, he didn't sketch buildings, humor me) and donates it on the spot. It sells for $10,000. Does Picasso have a write-off? I think I agree with littleadv here. If you paid employees a wage to produce the site, it might be a deduction, else you are looking to donate time, which isn't permitted. –  JoeTaxpayer Oct 9 '12 at 21:52
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It was my downvote. Sorry, I did mean to comment but got distracted earlier! While I'll almost always agree with "check with a professional", there ought to be something more than that to make it a good answer, otherwise it ought to be just a comment. Then, "Some of it may be" is rather tenuous .. there's nothing backing any of that second paragraph up. –  Chris W. Rea Oct 9 '12 at 23:00
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Hmm, your elaboration is interesting. I do believe I could count it as advertising because I build film festival websites, and I am primarily providing sponsorship in order to gain exposure for my new business to other festivals. However, like I said, the advertising I get is not equal in value to the value of the website they're getting, so I wouldn't consider it the same thing as purchasing advertising. I think in general though, you were right in the first place, I would need to contact an accountant to get a definitive answer. –  jessica Oct 10 '12 at 3:37

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.

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yeah, now that I think of its not that definitive. Its a product in a sense that it is something you create once and use many times, but it actually depends on the contract: if what's bought was the service to develop, and not the actual pre-developed site, then it might be service. –  littleadv Oct 9 '12 at 22:08
    
I think you're right that a website would probably be considered a service.. I thought of an analogy -- if you hired a carpenter to build some custom cabinets in your kitchen, I think the carpentry work would be considered a service rather than a product being sold, even though it is tangible. Would you agree? Rather unfortunate that in terms of deductions, the IRS devalues things that are bespoke or custom made. –  jessica Oct 10 '12 at 3:42
    
@jessica, I've added a bit to my answer. I'm far from a tax expert, as I've discovered by going down this rabbit hole. I like your analogy, That's probably how I would think of things, but I don't know how the IRS things about it. This question is probably a good argument for abolishing the distinction between products and services, but that's beyond the scope of this SE. –  Colin McFaul Oct 10 '12 at 22:39

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