Donating Software Education as a LLC

[pdfisher2929]

Hi!

My wife is CEO and owner of a birth education LLC. For a monthly membership fee, her company gives members access to a variety of tools and education around birth.

Every year, she gives a free memberships to various non-profits. Is there a place to deduct the donation of her product?

Additionally, she gives 1 year scholarships to 5 individuals from marginalized groups. Anything we should report here?

Thanks in advance for your help!

Paul

[AliciaP1]

Yes!  You can claim "gift" expense at a reasonable cost rate for service when given.  So, if you give a scholarship in 2021 for 1 year of free service you will expense the service cost as the membership/scholarship is used and not when in full or when given.  You expense a reasonable cost estimate rather than the marked-up sales price.

For instance, if you provide 1 year of service to your customer/client for $100 per month but the cost of software and membership management is $50 per month, you will expense $50 per month starting at the time the customer begins the service until the end of the tax year.  If the donation was made in May and the customer signed in to start service in June, then there would be a "gift" expense on the LLC tax return of $350 ($50 x 7months).

[pdfisher2929]

Nice. That all makes sense.

Does this situation apply at all to the $25 limit to individuals?

I think we are fine with the scholarships that we give to non-profit organizations, but how about the individual scholarships that we give out? Those individuals are using them for their own person business (we have an application process). So are we ok here too?

Thanks again for your help!!

[HelenC12]

Yes, the limit is $25. 

If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

• You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
  • If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
  • Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.
  • For purposes of the $25 per person limit, don't consider gifts costing $4.00 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.
• Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
• You need to have records that prove the business purpose of the gift as well as the details of the amount spent. Click here for the IRS source. 

[pdfisher2929]

Thanks1

I'm still just a little unsure if the $25 is only for individuals? Does it apply if it is a gift to a business?

Also--would applying our Net Income % be a reasonable cost of the service?

[JohnW152]

You may be able to consider it as an indirect gift to a particular person within the company. 

According to Gifts in Publication 463, Travel, Gift, and Car Expenses, A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.

In what context are you asking the Net Income Percentage question?

[pdfisher2929]

The net income percentage is in regards to how much we can deduct.

To restate more specifically, our company granted $8500 worth of scholarships to non-profits and self-employed individuals. The scholarships were 1 year subscriptions to our software service. I am trying to determine a couple things:

• If I classify these as gifts, does the $25 limit apply?
• Is there any situation where the $25 limit does not apply?
• If the $25 limit does not apply, is the Net Income % a good estimate of actual gifted cost?
• Is this the best way to treat these scholarships?

[RobertB4444]

The net income percentage is not a measure of the cost of an individual software subscription.  You should use actual costs related to each subscription.  In the case where you haven't broken out the cost per subscription then you should divide the annual costs of providing the subscriptions by the number of subscriptions provided.

The IRS is pretty clear on that $25 limit.  Here is their guidance.

You should classify these subscriptions and their costs as what they are.  If you are providing them for advertising purposes then they are advertising expenses.  If you are providing them as a donation then they are donations that will pass thru to the owners or be deducted on the corporate returns subject to limitations.

If they are gifts then you max out at a $25 deduction.

@pdfisher2929