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07/30/10 12:50pm PDT
Viewed by asker 11/24/10 6:33am PST

How to handle a contractor requesting a letter for donated services?

I have a small non-profit as a QuickBooks client who had some excavation and hauling work donated last year. The contractor is requesting a letter for tax purposes for the donation. As background, I'm a CPA, but not a tax expert. The request makes me uncomfortable for a couple reasons:

1) I know donated services aren't deductible, only out-of-pocket expenses incurred. The contractor is requesting that the non-profit disclose a donated amount equal to what they would normally charge for that service.

2) The amount they are requesting the letter state is approximately double what some of the other bids came in at. These other bids were for the entire project (not just the excavating and hauling portion), but did break the bid down in to project stages, and gave a subtotal for each.

3) Also, they recently increased the requested amount by $5,000, which really starts to make me uncomfortable.

4) Finally, they are requesting that the receipt be made out to the family's foundation, rather than the company/individual who actually performed the work. I'm pretty sure this is so they can meet the 5% distribution requirement.

Any comments or suggestions would be appreciated.

Dan Schmidt, CPA

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8 Replies

mojocpa

Accountant Community AllStar

07/30/10 1:00pm PDT

Sure, they want you to write the letter. I would run away as fast as possible. Smell test comes to mind.

If my post did not answer your question, get a paid Intuit employee's answer for Lacerte questions at 800-933-9999. Oh, and enjoy the elevator music while you wait.

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Amy-in-PA

Allstar, Accountant Community AllStar

07/30/10 1:21pm PDT

I suppose one could write a letter TO THE CONTRACTOR (not his family's foundation -- if he doesn't like it, tough!) saying something like "You donated services to the Small Non-Profit during 2009. Most bids for the work quoted a price of X, if Small Non-Profit had chosen them to do the work. If you wished for any reason to show a donation deduction of X, and offsetting income of X -- not that IRS would go along with this, anyway -- the amount you would show should be no greater than X. If Small Non-Profit is required to show donated services on its statement, X is the amount that will be used."

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Accountant Man

Accountant Community AllStar

07/30/10 1:28pm PDT

Since your records you should reflect the donation of the services as a "donation in kind" I see no problem giving him a letter for the amount originally agree upon, not a new amount. Your letter should say "for services donated in kind." No need to emphasize "services," but that's what is needed.

At a NP for whom I am a board member we recently had roofing done. The contractor donated the materials, and we paid him for his services. He got a charitable deduction, we saved a chunk of the total costs.

Unless the foundation did the work, or the foundation paid for the work to the contractor, you can only issue the letter to the contractor, not the foundation.

If you use Pro Series Basic I might not be able to help you. If you use Turbo Tax I might refuse to help you. All others, watch out! ;-)

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mojocpa

Accountant Community AllStar

07/30/10 2:22pm PDT

AM, how I read #1 above it sounds to me like the contractor wants the letter amount to be for "amount equal to what they would normally charge for that service" which I assume he would have a profit percentage built in. So wouldn't the letter amount would be more than just the out-of-pocket expenses?

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IRMN

Accountant Community AllStar

07/30/10 5:44pm PDT

mojo's right - they don't get a donation equal to the full billing price on the job. Sounds like you are dealing with some real doozies if on top of everything else they want the letter to go to the foundation. I would just write a letter to the contractor detailing the services that they performed without any dollar amounts. If they bugged me any more about it I would write a letter showing an amount equal to the lowest bid that was received and a 1099 to the company for the original amount that they wanted in the letter plus the $5000.

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Accountant Man

Accountant Community AllStar

07/31/10 6:46am PDT

Let's say the job cost $10,000, half in materials and half in services. If they do the entire job for free, then they get a donation of $5,000 for the materials. And the letter can say that the donation was $5,000 for materials and $5,000 of "in-kind services."

If the contractor was your client, and you saw this letter(which you should ask to see) then you know that the donation is limited to $5,000 only.

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IRMN

Accountant Community AllStar

07/31/10 8:11am PDT

Personally, I don't think I would want the contractor as a client so I don't think I will be looking at any letters.

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Mt Juliet CPA

Accountant Community AllStar

08/02/10 6:48am PDT