With the tax filing deadline looming on the not-too-distant horizon, you've probably begun to compile your 2008 tax information or have at least thought about it. However, there is one potential deduction that lawyers often miss.
Lawyers frequently provide pro bono services to charitable organizations but often overlook the potential tax benefits associated with providing such services. While no specific deduction is allowed for the fair market value of services contributed to a charitable organization, the Internal Revenue Code does allow a deduction for certain unreimbursed expenditures made incident to the rendition of services to a qualified charitable organization and can be grouped into categories that include travel, meals and entertainment, use of property and other expenses.
The taxpayer always bears the burden of proving that the unreimbursed expenses qualify as charitable contributions. An unreimbursed expense will qualify as a charitable deduction when both of the following two conditions are satisfied:
- The expenditure must be incident to performing the service for the organization; and
- The services must primarily benefit the charity and not the taxpayer.
In many instances, charitable services provided have a dual character in that they benefit both the organization and the taxpayer. In cases in which there is substantial personal benefit to the taxpayer (or to someone other than the charity), the IRS will typically deny the deduction.
Additionally, a deduction is not allowed for travel expenses incurred in connection with providing charitable services if the taxpayer enjoys a significant element of personal pleasure, recreation or vacation.
Despite this limitation, individuals are not precluded from deducting expenses associated with charitable services merely because they enjoy the activity.
A volunteer for a charitable organization can deduct the cost of driving to and from volunteer activities, and a deduction is also allowed for the costs of travel, including meals and lodging expenses, incurred while away from home overnight in rendering charitable services. Expenses incurred in attending a convention are deductible only if the taxpayer attends in some representative capacity and not merely as a member of the organization. As discussed above, if a significant element of personal pleasure, recreation or vacation is connected with the travel, the costs are not deductible.
In addition to lodging and meals, travel costs include those for air, rail, bus or car expenses, taxi, train or other fares between hotel and airport (or station), and other transportation-related costs. Reasonable tips for hotel employees, such as valets, bellboys and maids may also be deductible.
If a per diem allowance is received in connection with charitable services, the excess of actual travel expenditures incurred over the allowance is deductible. If the per diem allowance exceeds the expenses, that excess is includable in gross income to the extent it exceeds the taxpayer's actual travel expenses. It is also important to note that meals related to charitable travel are not subject to the 50 percent disallowance that applies to business expenses.
Use of Property
Often an individual will use his or her automobile, residence or other property while rendering services to a charitable organization. However, the cost of the property is not deductible even if the sole use of the property is for charitable service because the property was not given to the charity.
A deduction is also not permitted for the implied fair rental value of the use of the property or depreciation because neither represents an actual cash outlay on the part of the taxpayer.
In general, expenses directly related to the use of property to provide services are deductible if they are necessary to provide those services. For example, a lawyer may purchase a printer in order to print documents related to the charitable organization for which pro bono services are being provided. If ownership of the printer is retained by the attorney but used solely for printing documents related to the charitable organization, repairs and maintenance costs for the printer are deductible but the purchase cost is not.
Expenses related to the general maintenance of the property due to the taxpayer's ownership are not deductible. For example, if a taxpayer's home is used to serve a charitable organization, a deduction is not allowed for an allocable portion of the usual household costs, such as rent, utilities, mortgage payments, depreciation and similar costs. However, actual out-of-pocket expenses required to perform the services are deductible.
Fundraisers & Other Expenses
Various out-of-pocket expenses related to the sponsoring, planning or hosting of a charitable fundraiser may be deductible, including the costs of cocktail and dinner parties related to such events.
Other potentially deductible expenses often overlooked when a lawyer or other individual provides services to a charitable organization include advertising costs, broadcasting expenses, office supplies, telephone bills, filing fees and postage expenses. However, a deduction for expenses incurred are not allowed if the purpose of the expenditure and related activity is to lobby for a legislative change.
The Internal Revenue Code requires written acknowledgement of cash contributions of $250 or more. However, special substantiation provisions apply to out-of-pocket expenses incurred while providing services to a charitable organization. The written acknowledgement requirement is satisfied if both:
- The taxpayer has adequate records to prove the amount of the expenses; and
- The taxpayer has an acknowledgement from the charitable organization that contains a description of the services provided; a statement of whether the organization provided any goods or services in consideration for the unreimbursed expenses; and a description and good faith estimate of the value of any goods or services provided.
Car expenses related to providing services to charity are generally deductible, but reliable records must be retained to substantiate the deduction and charitable-related purpose. Records made regularly and close to the time the expense is incurred, such as a mileage log, diary or account book, are considered reliable.
Because out-of-pocket expenses paid with a check or credit card do not have the name of the charity on the statement, these expenses should be documented in the same manner as cash expenditures, by securing a written communication from the charity.
Attorneys often provide valuable pro bono legal services to the nonprofit community and should consult their tax advisers regarding the potential tax benefits associated with the performance of those services. With proper planning, volunteering can be personally rewarding and can also meaningfully reduce your tax obligation.
Barbara A. Ruth is a senior manager in the tax accounting group of Duane Morris, where she devotes her practice to federal, state and local taxation. She also devotes her practice to litigation consulting services, including criminal and civil tax controversies, damage measurement and marital dissolution. Ruth is a member of the Philadelphia Bar Association's Committee on Women in the Profession and the State and Local Tax Committee.
As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.
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