Are in-kind donations from my S-Corp tax-deductible in any way?
"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." "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."
"As others have mentioned, it's important that there is a fair assessment of the market value of the items being donated.  Joel's point about the government not looking kindly upon overvalued donations also applies in Canada: the CRA doesn't look kindly upon donation schemes such as ""buy-low, donate-high arrangements."" Since nobody has offered up authoritative information for Canada yet, here's something to look at: Excerpts: 3) Gifts in kind of a taxpayer   include capital property, depreciable   property, personal-use property ... [...]   6) The fair market value of a gift in   kind as of the date of the donation   (the date on which beneficial   ownership is transferred from the   donor to the donee) must be determined   before an amount can be recorded on a   receipt for tax purposes. [...]  The   person who determines the fair market   value of the property must be   competent and qualified to evaluate   the particular property being   transferred by way of a gift. Property   of little or only nominal value to the   donor will not qualify as a gift in   kind. Used clothing of little value   would be an example of a   non-qualifying contribution. You will need to find a charity that would both value the books you would be donating and be willing to issue you a receipt for your charitable donation.  Whatever receipt they issue should be in line with fair market value of the goods donated.  Assume your donation receipt will be challenged, and keep both: Finally, reasonable comparables might be prices for similar used goods, not a percentage of new.  Though, if you can't find a price for a particular title in the used market, an estimate consistent with other valuations in the lot would be better than nothing, perhaps." You better consult with a tax adviser (EA or CPA) on this, my answer doesn't constitute such an advice. Basically, you're selling stuff on Kickstarter. No matter how they call it (projects, pledges, rewards - all are just words), you're selling stuff. People give you money (=pledges) and in return you're giving them tangible or intangible goods (=rewards). All the rest is just PR. So you will pay taxes on all the money you get, and you will be able to deduct some of the expenses (depends on whether its a business or a hobby, the deduction may be full or limited). It doesn't matter if you use LLC or your own account from the financial/taxation point of you, but it matters legally. LLC limits your personal liability, but do get a legal advice on this issue, and whether it is at all relevant for you. If you raise funds in 2012 you pay taxes on the money in 2012. If you go into production in 2013 - you can deduct expenses in 2013. If you're classified as a hobby, you'll end up paying full taxes in 2012 and deducting nothing in 2013. Talk to a tax adviser. "Technically, this is considered ""income"" for you, and is actually not considered a ""donation"" for your donors, but is instead a ""gift"" (not tax-deductible for your donors). So, you are technically required to report it, and there is a pretty significant audit trail that can be followed to prove you made that money. I don't know if PayPal is required to file 1099s for payments received, but if you've ever received such a document, so has the IRS, and they'll match it to the income you claimed and see a discrepancy, triggering an audit. Depending on the amount that it affects your taxes (it can be significant; if you have a  $50k/yr day job, you'd owe the government 25 cents on every dollar donated), they can let it slide, they may simply dock your next return, or they may come after you for interest and penalties or even charge you with criminal tax fraud if they could prove you maliciously attempted to conceal this revenue. Now, if you already itemize using a Schedule A, then you can erase this income by deducting the costs of the server, not to exceed the amount of the donations. The best you can do is offset it; you cannot use this deduction to reduce taxable income from other sources. Also, you must itemize; you can't take your standard deduction, and with a maximum possible deduction of the actual costs of running the server ($1500, IF you receive enough donations to fully pay for it) compared to one person's standard deduction ($5800), you'll want to take the standard deduction if you don't have other significant deductions (medical expenses, mortgage interest/property taxes, etc). If you were charging users a monthly fee for use of the server, then you've basically created a de facto sole proprietorship, and you would still have to count the fees as income, but could then deduct the full cost of running the server. You'd fill out a Schedule C listing the revenue and expenses, and back them up with statements from your ISP/hosting company and from PayPal. Now, this would apply if you were running the server with the primary goal of making a regular profit; Schedule C cannot be used for income from a ""hobby"", undertaken primarily for enjoyment and where a few bucks in revenue is gravy. Whether you think you can get away with that in your current situation is your prerogative; I don't think you would, given that the donations are solicited and optional, and thus there is no expectation of ever turning a profit on this game server." "Nope, not deductible. It's true that some investment expenses are deductible, mainly as ""miscellaneous itemized expenses"", though only the amount that exceeds 2% of your adjusted gross income.  But as explained in IRS Pub 550, which lays out the relevant rules: Stockholders' meetings.   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. This is true even if your purpose in attending is to get information that would be useful in making further investments." Not sure how authoritative it is, but according to this site, yes: Can a corporation, partnership or other non-living entity make the contribution to an ESA? Yes. The tax law does not restrict the ability to make contributions to living individuals. Corporations and other entities may make contributions without regard for the usual donor income limit.  However, the same site indicates that you can just give the child the $2K and have them contribute to their own ESA, so yes, the income limit is pretty easy to get around. It is correct, in general. Gift tax is indeed at 35%, but you have the first 14K of your gift exempt from it for each person you give to, yearly (verify the number, it changes every year). You can also use your lifetime exemption ($5.45M in 2016, subject to change each year), but at the amounts you're talking about it still will not be enough. Charitable (501(c)) organizations, paying for someone's tuition or medical expenses (directly to the providers), political donations, transfer between you and your spouse - these are all exempt from gift tax. If you have 10 millions to give, I'm sure you can afford a $200 consultation with a EA/CPA licensed in your state. "Yes, you can make the election to file your LLC as an S-Corp, and Turbo Tax Business can help you with the S-Corp business return. You need to make sure you're set up correctly and there are a lot of things to be aware of. For example, the whole ""reasonable salary"" thing is a can of worms. So while the answer to your question is ""yes, it's manageable, you can do it on your own,"" it might be worthwhile to have a professional help you the first year, make sure it's set up right, and then you can do it on your own in subsequent years." Generally this is simply a matter of the business paying taxes on the sale (income), balanced by a credit (charitable deduction), which eventually adds up to their not paying taxes on money they collected in order to pass it along to the charity. Note that because the business is taking the deduction on that donation, you can't take a deduction on the charitable portion of your purchase. "Can I deduct the money that I giving to my team mates from the taxes   that I pay? If yes, how should I record the transaction? Why? Why are you giving money to your team mates? That's the most important question, and any answer without taking this into account is not full. You would probably have to talk to a professional tax adviser (a CPA/EA licensed in your state) about the details, but in general - you cannot deduct money you give someone just because you feel like it. Moreover, it may be subject to an additional tax - the gift tax. PS: We don't have any partnership or something similar, it is just   each of us on his own. Assuming you want to give your team mates money because you developed the project together - then you do in fact have a partnership. In order to split the income properly, you should get a tax ID for the partnership, and issue a 1065 and K-1 for each team mate. In most states, you don't need to ""register"" a partnership with the state. Mere ""lets do things together"" creates a partnership. Otherwise, if they work for you (as opposed to with you in the case above), you can treat it as your own business income, and pay your team mates (who are now your contractors/employees) accordingly. Be careful here, because the difference between contractor and employee in tax law is significant, and you may end up being on the hook for a lot of things you're not aware of. Bottom line, in certain situation you cannot deduct, in others you can - you have to discuss it with a professional. Doing these things on your own without fully understanding what each term means - is dangerous, and IRS doesn't forgive for ""honest mistakes""." I don't do corporate tax exclusively, but I don't think you're correct. The idea of pre-tax and post-tax earnings is significantly different from corporations than individuals since individuals see their taxes come out when they earn it and corporations pay taxes quarterly.  At the very least, it's certainly not equivalent to a charitable contribution. "Donations, particularly those in the context of you providing a free service (software, libraries, etc.) are a notable grey area in tax code. Simply naming a button ""Donate"" doesn't necessarily classify the money transfer as a ""gift"". The IRS can decide that it's money you're being paid to continue your excellent work/service, making it taxable income (unless you're a registered non-profit organization). In the instance of Patreon, and many other crowd-funding services, you're providing a certain level of ""service"" for each tier of donations (such as early access or something, I'm not sure what you're offering), which means they're receiving consideration for their donations, which most likely makes it fall into taxable income (again, unless you're a registered non-profit organization). State tax law is even more convoluted, and you should consult your tax professional for clarification on your specific situation." Federal income taxes are indeed expenses, they're just not DEDUCTIBLE expenses on your 1120. Federal Income Tax Expense is usually a subcategory under Taxes. This is one of the items that will be a book-to-tax difference on Schedule M-1. I am presuming you are talking about a C corporation, as an S corporation is not likely to be paying federal taxes itself, but would pass the liability through to the members. If you're paying your personal 1040 taxes out of an S-corporation bank account, that's an owner's draw just like paying any of your personal non-business expenses. I would encourage you to get a tax professional to prepare your corporate tax returns. It's not quite as simple as TurboTax Business makes it out to be. ;) Mariette IRS Circular 230 Notice: Please note that any tax advice contained in this communication is not intended to be used, and cannot be used, by anyone to avoid penalties that may be imposed under federal tax law. Do I report it as income? Is it subject to just the same amount of   taxes (~30%) as regular income? Are there any restrictions on how it   can be used? It is income. You can deduct the costs of maintaining the web page and producing the software from it (have an accountant do that for you, there are strict rules on how to do that, and you can only deduct up to the income if its a hobby and not a for-profit business), but otherwise it's earned income like any other self employment income. It is reported on your schedule C or on line 21 of your 1040 (miscellaneous income), and you're also liable for self-employment taxes on this income. There are no restrictions, it's your money. Technically, who is the donation even being made to? Me, just because   I own the webpage? Yes. This is for the United States, but is there any difference if the   donations come from overseas? No, unless you paid foreign taxes on the money (in which case you should fill form 1116 and ask for credit). If you create an official 501(c) organization to which the donations are given, instead of you getting it directly, the tax treatment will be different. But of course, you have to have a real charitable organization for that. To avoid confusion - I'm not a licensed tax professional and this is not a tax advice. If in doubt - talk to a EA/CPA licensed in your State. "If this is truly hobby income (you do not intend to operate as a business and don't have a profit motive) then report the income on Line 21 (""other income"") of form 1040.  If this is a business, then the income and expenses belong on a Schedule C to form 1040. The distinction is in the treatment of profits and losses - your net profits on a business are subject to self-employment tax, while hobby income is not. Net losses on a business are deductible against other income; net losses on a hobby are miscellaneous itemized deductions in the ""2%"" box on Schedule A.  From a tax point of view, selling apps and accepting donations are different. Arguably, donations are gifts; gifts are not taxable income.  The hobby/business and income/gift distinctions are tricky. If the dollar amounts are small, nobody (including the IRS) really cares. If you start making or losing a lot of money, you'll want to get a good tax person lined up who can help you decide how to characterize these items of income and expens, how to put them on your return, and how to defend the return on audit if necessary." Here is a quote from the IRS website on this topic: You may be able to deduct premiums paid for medical and dental   insurance and qualified long-term care insurance for yourself, your   spouse, and your dependents. The insurance can also cover your child   who was under age 27 at the end of 2011, even if the child was not   your dependent. A child includes your son, daughter, stepchild,   adopted child, or foster child. A foster child is any child placed   with you by an authorized placement agency or by judgment, decree, or   other order of any court of competent jurisdiction. One of the following statements must be true. You were self-employed and had a net profit for the year reported on   Schedule C (Form 1040), Profit or Loss From Business; Schedule C-EZ   (Form 1040), Net Profit From Business; or Schedule F (Form 1040),   Profit or Loss From Farming. You were a partner with net earnings from self-employment for the year   reported on Schedule K-1 (Form 1065), Partner's Share of Income,   Deductions, Credits, etc., box 14, code A. You used one of the optional methods to figure your net earnings from   self-employment on Schedule SE. You received wages in 2011 from an S corporation in which you were a   more-than-2% shareholder. Health insurance premiums paid or reimbursed   by the S corporation are shown as wages on Form W-2, Wage and Tax   Statement. The insurance plan must be established, or considered to be   established as discussed in the following bullets, under your   business. For self-employed individuals filing a Schedule C, C-EZ, or F, a   policy can be either in the name of the business or in the name of the   individual. For partners, a policy can be either in the name of the partnership or   in the name of the partner. You can either pay the premiums yourself   or your partnership can pay them and report the premium amounts on   Schedule K-1 (Form 1065) as guaranteed payments to be included in your   gross income. However, if the policy is in your name and you pay the   premiums yourself, the partnership must reimburse you and report the   premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to   be included in your gross income. Otherwise, the insurance plan will   not be considered to be established under your business. For more-than-2% shareholders, a policy can be either in the name of   the S corporation or in the name of the shareholder. You can either   pay the premiums yourself or your S corporation can pay them and   report the premium amounts on Form W-2 as wages to be included in your   gross income. However, if the policy is in your name and you pay the   premiums yourself, the S corporation must reimburse you and report the   premium amounts on Form W-2 as wages to be included in your gross   income. Otherwise, the insurance plan will not be considered to be   established under your business. Medicare premiums you voluntarily pay to obtain insurance in your name   that is similar to qualifying private health insurance can be used to   figure the deduction. If you previously filed returns without using   Medicare premiums to figure the deduction, you can file timely amended   returns to refigure the deduction. For more information, see Form   1040X, Amended U.S. Individual Income Tax Return. Amounts paid for health insurance coverage from retirement plan   distributions that were nontaxable because you are a retired public   safety officer cannot be used to figure the deduction. Take the deduction on Form 1040, line 29.