When you record donated services in QuickBooks you never receive any money, therefore nothing happens in the banking part of your books. When it comes to figuring out how to book any transaction in QuickBooks the idea is to think of the books as a mirror image of what really happened. Since this transaction doesn’t impact the banking at all then nothing should happen in the banking part of QuickBooks. This is assuming that the entire transaction is for donated services. But what if we bill a client for $2,800 and donate $1,300 of those services. The client will need to pay us $1,500. So we have several things to post when we record Donated Services in QuickBooks under this scenario.
- We have Sales (income recognized) of $2,800.
- We have donated services (an Other expense) of $1,300
- We have Accounts Receivable of $1,500
- We will receive and deposit a payment from the client of $1,500.
The reason Donated Services is an “Other” Expense is that we are not in the business of donating services.
The trick to this is in understanding the components of the transaction so that you can deal with each one separately and record the transactions accordingly.
Since the $1,300 in donated services will never be received or paid out it does not impact our bank account in real life. Therefore it should not impact our bank account in QuickBooks. This leaves us with really only one other place to deal with donated services in QuickBooks which is the invoice itself. Simply put you would record it as follows:
- Invoice the full amount of the services to your service item at $2,800 to recognize all of the income
- In a separate line item on the same invoice use an item which you set up linked to “Charitable Contributions” – an other expense account and the item is called “Donated Services.”
- Book a “Negative” $1,300 on that Donated Services line item. This will reduce the invoice total to the $1,500 which is where we want it and using the donated services as a “negative” amount will result in a positive expense to Charitable Contributions.
The screen cast will demonstrate this for you:
If you would like the exercise file (The QuickBooks File) so you can see the items and transaction and trace it all through this is a great way to learn about how to set these things up. Click on the folders to download them:
Seth,
Love your work.
I would like to make an observation as this topic comes up in my practice, I am a CPA.
Usually a client wants to deduct the value of their donated time or services. I tell them you can’t because you have no tax basis in your time. Meaning since you have not paid tax on that time, you don’t have tax basis to deduct.
Your approach, if carried to the tax return, does create tax basis so you would assume you could deduct the charitable portion.
However, at best, the net result is no additional tax benefit on your return since you are increasing taxable income (value of donated services) equal to the charitable deduction (amount of service donated). You are adding income equal to the deduction. At best, they cancel each other out.
I can think of three situations where you will actually pay more by trying to claim the donation of time or service.
1) Partners and Shareholders in S-Corps and Partnerships and Sole Proprietorships have to segregate charitable contributions and report them separately on their personal tax returns, not netted against business income. The charitable contribution is reported below the line (Adjusted Gross Income) and the income is reported above the line. Depending on the income, this may cause come of your other deductions to be phased out since you are increasing AGI, the starting point for phaseouts.
2) The net income for Partnerships and Sole Proprietorships is subject to self-employment tax. In this method, you are increasing the income that is subject to SE tax. Charitable contributions do not lower SE income.
3) If you are taking the standard deduction, you will not benefit by the charitable portion but will be paying tax on the income portion.
My advice is, you are better to book just the amount will receive as income.
Scott
Thanks Scott! I agree with you 100%. I think this is something that people would literally do out of the sheer kindness of their hearts
I actually wrote back to the person who wrote in and asked the question leading to this blog post and explained that there is no tax benefit because as you pointed out you have to recognize the income anyway so it washes with the charitable contribution.
The tax implications you point out, however, are good ones! So it does appear it would be better not to report these donated services and not to recognize the income.
This helped a lot. I’m the managing partner at my company which is a partnership, and it was a really good thing that I read the comments. Thanks to the both of you!