Monday, April 5, 2010

Charitable Deduction for Reduced Rent? Part 2

Here is the same situation, but the question is coming from the not-for-profit...

Q - We are a not-for-profit; we asked our landlord to lower our rent by $500. He said he would agree if we gave him a receipt saying he had donated $500. Can we do this since we did not actually receive the $500? How do we balance our books if no contribution was actually received?

A - It is quite proper for you to give the landlord a contribution receipt for his gift-in-kind contribution.

The not-for-profit records gift-in-kind income to recognize the transaction. The books balance the contribution income with rental expense. Rental expense is recorded just as it would if cash had been spent. Again, it is a wash transaction. But there was a real donation of the rental space that the organization can recognize.

Many organizations don't properly recognize all of the gift-in-kind income they receive by way of donated services. However, not all donated services should be recognized, only those that the organization would have had to spend cash on if they had not been donated. Examples are legal, accounting, or other professional services. Normal 'volunteer' activities that a person performs for the organization are not included.

Charitable Deduction for Reduced Rent?

Q - I own a building that I rent to a non profit organization for $500/month. If I decide to lower the rent to $400/month, can I ask for a receipt stating I gave the organization $100/month as a donation and use that for a tax deduction?

A - Basically, no.

In order to claim a charitable deduction of the $100, you would have to report $500 in income. The IRS would look at your situation as a wash transaction: it is as though you received the full $500 in rent, and then turned around and donated $100 in a separate transaction.

The situation could even be worse by recognizing the contribution if you do not itemize deductions: you would be reporting the full $500 in rent and you wouldn't be able to deduct the charitable contribution because you didn't itemize.

The IRS only recognizes gifts of property as charitable contributions, not gifts of services or gifts of the partial use of property.