Tax Write-Offs For Free (As In Speech) Work?

deuist writes "Several years ago I wrote a book called The Not So Short Introduction to Getting Into Medical School (PDF) and released it online under a Creative Commons license. I have been asked several times to publish the text so that I can make money off of it. The book has become quite famous among pre-med students and is now available from the Princeton Review as a free CD that is given to pre-medical interest groups. My question to the Slashdot community involves claiming this work as volunteering for tax purposes. Have any of you had any success with releasing free software and then writing off your time when April 15 rolls around?"

Comments

Deductibility of labor rendered

[tonymus]

My question to the Slashdot community involves claiming this work as volunteering for tax purposes. Have any of you had any success with releasing free software and then writing off your time when April 15 rolls around?"

How exactly do you propose writing off your time? As a charitable deduction? On Schedule C (Sole Propietorhip Income & Loss)? No matter...I don't think the IRS will let you deduct this either way.

Generally, self-provided services are not eligible for charitable deduction, ditto Schedule C. It makes sense if you think about it. When you take a deduction on Schedule C, someone else must pick up income. If you were the creator of the labor "sold", you created both the income and deduction. If the IRS were to allow you to take a labor deduction for your own services on Schedule C, it logically would figure that you'd also have to include the income that resulted from such deduction, either also on Schedule C, or on Form 1040, Line 7 (the W-2 line).

Then again, what do I know?

MS model?

[wurp]

If you charge for something, and have purchases, then isn't any copy of that thing that you give away a business loss?

How is this different than MS writing Vista, which they sell, then taking a tax write-off for the full value of Vista when they give 100,000 copies to schools?

You're not writing off your time; you're writing off the value of the goods you gave away.

I am not a lawyer or an accountant. I'm just asking the question :-)

Re:MS model?

[conlaw]

wurp, I think you're on the right track. Altlhough I am a retired lawyer, I never practiced tax law. However, I believe that the following analysis falls within the terms of the IRS code.

Assume that the good doctor had originally copyrighted the material and sold a bunch of the books/CD's, etc. at a reasonable price (let's say $20-$25 each). Now, however, the doctor has seen the light of FOSS and starts giving the books away to aspiring med school students. I would argue that this puts the doctor in the same position as Microsoft in your example; i.e., giving away products with an established value.

Looking at what really happened and the good intent in giving the work away from the beginning, I'm afraid that the only wisdom we can offer is the old saying: "No good deed goes unpunished."

Re:MS model?

[wurp]

I did think about it. Do software publishers pay tax? Do you have evidence one way or another?

'cause I couldn't find any.

It's A Hobby

[Nom du Keyboard]

When you aren't making money from an endeavor, especially if you can't point out how it may lead to making money in the future, it's not a job to the I.R.S., but a hobby. And you can't write off expenses of a hobby. The earlier poster who says his stellar C.P.A. who found lots of write-offs has likely yet to survive an I.R.S. audit over them. You may not be so lucky.

You will receive lots of suggestions here. Mine is, and I've worked as a consultant and had write-offs, that you need to show how all these efforts are leading towards profits in the future. It's not a crime to lose money in your business, however, after a certain point (IIRC 3 years, but talk to a professional about this) the I.R.S. will no longer consider your efforts a business.

One suggestion: Chalk all this up to generating resume cred for future jobs that do pay.

double dipping

[jdh3.1415]

You can't write off volunteer time. That would be double dipping. The good news is you don't have to pay taxes on the money you didn't earn while working on your book.

Imagine your time is worth $50.00 / hr. You could donate 100 hours of time by working for 100 hours for $5000. Then, you could donate the money back to the charity and deduct the $5000. Or, you could work for free for 100 hours and forgo the deduction. Both scenarios would put you in the same place tax wise.

On the otherhand, if you worked for free and took a deduction, you would essentially be taking the deduction twice. The IRS doesn't take kindly to this.

Re:I write off thousands every year to OSS

[alphad0g]

You can write off un-reimbursed business expenses and charitable contributions. Working on OSS projects does not qualify as either one unless your company is paying you to do this from home - then you can write off your router/internet/etc. as long as they are for business only. Driving to LUG - how does that fit? LUG is not a recognized charity, nor is 99.999% of OSS. Taxes on your home should be deducted as part of one of your normal itemized deductions; if you are taking another part of them for this OSS work, you are double dipping. Ask your CPA if he will pay the fines when you get audited? You may want to be ready with an alibi when IRS comes knocking - tell them you have a wireless router that has no encryption and someone was parked outside, posting to slashdot. Also, I would find a reputable CPA, as this one is giving you some bogus info.

Tax code is *code*

[billstewart]

My wife, a computer scientist, did tax preparation during the 80s. The tax code is code - is was written to do things, and it's buggy and badly documented, but it's code. At the time she started, most of the tax code generally made some sense - it was full of special interest giveaways, obfuscation, ill-advised attempts at social policy, etc., but she had the impression that the people writing it generally knew what they were trying to accomplish with most sections - but the Reagan "tax cut" years added 30-50% more tax code, and she got the impression from watching the changes that the Congress was losing track of what it was trying to accomplish. There'd be things that got put in one year and patched the next (e.g. they were trying to do a favor for one Indian-run casino in South Dakota, the patch corrected the unintended favor that they'd also done for a casino in New Jersey, etc.)

The basics about deductability of things you've performed for charity probably haven't changed much since I last looked at it 20 years ago. If they paid you $X for your labor and you donated $X to them, you'd break even. That's not different if you're charging them $0. On the other hand, if you're donating materials in kind, you might be able to donate the costs of those materials - your CPA can tell you, and some kinds of deductions like costs of home offices are so often abused that you need to be very careful if you want to even try.

However, if you own a profit-making business, it's easier to have things you're doing be done by the business and therefore be expenses of the business. That's still not going to let you get paid for your labor, but costs like your computers, power, etc. are easier to put there, reducing the profit your business makes and therefore reducing your business's taxes. But if your business loses money more than X years out of Y, the IRS says it's not a business, it's a hobby, and you can't deduct the costs.

Short Answer: You Can't; Longer Answer: Maybe

[rfc1394]

For tax purposes your labor is worth exactly zero and thus your work to produce the book is worth exactly zero and that's how much you can legally deduct. Yeah, the laws are rigged against you but that's how the game is played. Any actual out-of-pocket expenses - cash you spend or credit on your cards - are deductible, however. But you either have to be donating the cost to a charity or taking it as a business loss by declaring it a side business.

I'm presuming you want something legally defensible if the IRS audits you. If you don't care about whether it will withstand an audit and expect your chance of audit is low, you can try it but if you get caught, if your tax goes up there will be interest and if the difference is big enough, penalties. If it can look like a simple misreading of the tax laws then that's all you might have to worry about. If the IRS thinks it was intentional tax evasion then it gets very sticky. So we probably want a better solution if one is available.

So the short answer is no, you can't deduct your labor, but, if it can be determined the book has some sort of value then you might be able to donate that to a charity; some authors have donated their personal papers and gotten estimates of their value, and could donate that and deduct that, legitimately.

But that's not where the story ends, which is why tax accountants and lawyers make big bucks. I don't know if either of the following is legal, it was just right off the top of my head, but, then again, I'm not a lawyer nor a tax accountant. So you'd have to ask one and if these aren't fully legal as is, you might still be able to use the ideas from one or both of them or some variant. Or an attorney might know a legal way to do it.

1. Incorporate, have your corporation "pay' you with a promissory note for the value of your services, have it own the book, and when it can't pay you, take a loss for the value of the note. Possibly do the same thing as I suggest in the item below, have it purchase some things you would normally spend your own money on, then deduct the money loaned to the corporation as a loss when it is closed. As I point out below, if you even have to file an 1120 (Corporate income tax return) it's only going to show income and expenses, it is not going to explain what specifically the expenses were for. Depending on how it's done it might or might not work. If it's too nakedly obvious it will look suspicious and might not fly.
2. Set up a member-managed LLC, have it own the book, and charge it for the cost of the book. LLCs can be treated as pass-through entities, losses it incurs are charged to you, income it receives is treated as if you made it, so it's possible that the losses on the book, since it's not your labor, are deductible to you. If you loan the LLC funds and then have it purchase things with that money that you would normally spend personally, arguably then the costs it spends can be passed through to you as losses, and since you don't get any profits, there's no offsetting profits to account for. The IRS is not going to know what the LLC spent money on as it doesn't file a return, you do. Might even be reasonable if it "fails" in its first year as many businesses do, then you won't even have to pay the renewal fees!

Again, I don't know if either of these will withstand scrutiny either, but a good tax accountant or tax lawyer might be able to figure a scheme that does work.

If you learn how things work it isn't that hard to do them. I have a corporation which I'm not using right now, it only costs $25 a year to renew its charter, so I do, and every year I file state and federal returns showing income and expenses as zero. Since it doesn't get paid anything and basically spends no money except for what I have it do, it requires very little trouble. Since I don't need the deductions right now, I don't use all of the rules that are allowed, but if I do I have the tools to do so.

You could set up your own non-profit corporation (will