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Do I have to recognize income to claim deduction for use of theater?

Your Legal Questions Answered

Do I have to recognize income to claim deduction for use of theater?

I recently acquired an outdoor movie theater and have donated full use to a 501(c)(3) nonprofit theater organization, for which I receive no rent. My accountant says the only way I can obtain a charitable contribution deduction is if I "recognize" income for the theater that would be equal to or greater than the amount of the deduction. I do not understand. I have other theaters I operate for profit and pay tax on the income. I would be pleased to accept an objective/independent appraisal as a reasonable "rental value" donation.

Your accountant is correct about the deduction, but probably not giving you the best advice if he or she is suggesting you recognize the income and then claim a deduction.  You are not entitled to a charitable contribution deduction for a gift of services or for use of facilities.  It may not be entirely logical, but it is the rule.

If you receive actual rental income, you could claim a charitable contribution deduction if you give the money back.  (I will assume that you could get the same result if you merely “recognize” the transaction without actually doing it.)  The income and the deduction would basically cancel each other out for federal income tax purposes.  But there are other taxes that are based on income, such as social security or Medicare at the federal level, income taxes at the state level in some states, and gross receipts taxes at the local level, for which there is no corresponding deduction for charitable contributions.  For those taxes, you would be increasing your income — and your tax liability — without getting any benefit from the contribution.

Athletes and entertainers, who, like everyone else, may not claim a deduction for volunteer services, have generally learned that it makes more sense to waive an appearance fee from a charity than to take the fee, pay the taxes, and make a contribution back. The same logic applies to you.

Tuesday, November 22, 2011

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