eRank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.
This information applies to crafters in the United States of America (USA). However, crafters in other countries might find this information useful.
It has been my experience that crafters often wish to give back to their community, help local organizations, and assist their favorite charities. They usually do this through the donation of their handmade items. While donating to help the organization, project, or charity, crafters are still operating a business and should always be on the lookout for ways to reduce their yearly tax expense. The question arises, though, what is the allowable deduction amount for donating your handmade item?
To determine the deductible amount, let’s look at some possible scenarios.
A local charity that you support asks for a donation of one of your handmade items for a fundraiser. You gladly offer an item to them. The item consists of $15 material cost and two hours of your time. The item normally sells for $60. What amount, if any, is tax deductible?
Your child’s public school asks that you work a booth at their fall carnival to demonstrate to the kids how to make one of your handmade items. You supply $100 worth of materials plus three hours of your time. All proceeds from the carnival go towards purchasing school supplies. What amount, if any, is tax deductible?
Your neighbor has a booth at a local festival. She asks if you would donate a handmade item as a giveaway prize to bring people to her booth. You donate a small item that is worth $3 material cost and 30 minutes of your time and sells for $20. What amount, if any, is tax deductible?
You donate a handmade item to the high school’s drama department. In exchange, you receive a free ticket to this year’s senior play. The item consists of $20 material cost and one hour of your time and sells for $50. The senior play ticket price is $15.
All four scenarios above have an amount that can be a tax deduction, depending on certain criteria. However, all four scenarios are not donations with regards to a charitable tax deduction but may qualify as a business expense tax deduction.
To be a charitable tax deduction, the organization to whom the donation is made must be a qualifying organization. If you are unsure, ask the organization for proof of their nonprofit or charitable status or in the US, search the IRS’s tax exempt database.
Volunteer time is never a tax deduction nor is the time used to make a handmade donated item. The amount that is deductible is the fair market value of the cost of the materials, not the retail amount of the handmade item. When donating, you must also take into consideration anything of value received in return for the donation.
Let’s return to the above scenarios to determine the deductible amount in each instance.
If the organization is officially classified as a charity, the $15 material cost would be a charitable donation.
Donations to public schools are tax deductible. If a private school, check with the school regarding their tax status. Many private schools are registered qualifying organizations. If deductible, the amount allowed would be the material cost of $100. If all the materials are not used, though, only the amount used would be the allowed deduction amount. Also, while your time is not deductible, your mileage to and from the event might be an additional deduction amount.
Your neighbor is not a qualifying organization. Therefore, no amount of the donation is a charitable tax deduction. However, if the neighbor allows you to attach a business card to the item, it may be considered a business expense deduction classified as advertising or marketing. The amount of the business expense deduction would be the cost of the materials only, which is $3.
A donation to a program of a public school or qualifying school is a charitable donation. The $20 material cost would be the donation amount. However, since something of value was received in return (ie. the ticket), the value of the received item must be deducted from the donation amount. In that case, the deduction amount would be $5 ($20 material cost less $15 ticket price).
Donating your handmade items is a great way to help out charities, local organizations, and your community throughout the whole year as well as creating a tax deduction for your handmade business. Knowing the amount of your donation that is deductible is an important part of correctly accounting for that donation. The tax deduction, however, is second to the joy you will receive from helping others and your community while sharing your handmade creations.
If you are interested in donating your handmade items but do not have anywhere in mind locally, you might want to check out the article on the DIYToDonate’s blog “Featured Charities that Accept Handmade Items.”
Michelle Badger, Accountant (25 + years) and Etsy seller