Question: My father is retired and volunteers about 40 hours per week at the church doing maintenance. He was told my a business owner to open an LLC and get a letter from the church for his work to used as a tax deduction. Is this really plausable since they LLC wouldn’t be generating income? How would this effect his personal taxes? Is there a way to actually do this? Thank you.
Answer: If your father establishes an LLC, he will be able to write off out-of-pocket expenses for volunteering only if there is a profit motive. The value of his time spent volunteering is not an expense. However, he may have a charitable contribution deduction.
Is there a profit motive?
There has to be a profit motive to treat your father’s time volunteering to be considered a business. There is a rule that a business should earn a profit three out of five consecutive years. If this test is not met, then the IRS evaluates 9 factors to determine if there is a true profit motive. If there is no profit motive, then your father’s volunteering time is treated as a hobby. This would mean he can only write off out-of-pocket expenses up to the income he earns. If you like to read more about this, I did write two blogs about “For-Profit” business versus hobby.
Tax Consequences for Determining if a Business is For Profit or Hobby
For Profit Business or Hobby, Facts and Circumstances
I assume the business owner recommended your father to establish a LLC to show that a business was establish. The LLC will not protect your father if there is no profit motive.
Charitable Contribution
Your father may be eligible to deduct out-of-pocket expenses as a charitable contribution deduction. Your father would need to claim itemized deductions and not a standard deduction to get a tax benefit. Please let me know if you need more explanation on itemized deductions. Your father may be able to deduct any unreimbursed out-of-pocket expenses that are directly related to his time volunteering. For example, he purchased new tools specifically for maintaining a generator in the church. The tools purchased may be considered a charitable contribution. He can also claim $0.14 per mile for driving to and from the church. The following link further discusses deducting out-of-pocket expenses as a charitable contribution.
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.