Many law firms provide free legal services to charitable organizations on a regular basis, but this doesn’t always mean they can take a charitable contribution deduction for it. If you operate your own law firm or are a partner in one that provides similar legal services, it’s important that you understand when you can take a charitable deduction and which expenses you can include.
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Charity Receiving Services
All businesses and individuals are subject to the same requirements when claiming a charitable contribution deduction on a federal tax return. This means that the organization receiving the free legal services from your firm must be an IRS-approved charity. Approved charities are those that obtain, or automatically receive, tax-exempt status from the IRS—meaning they don’t pay income tax on the funds they raise for the charitable purpose. Therefore, even if some of your pro bono clients don’t operate for profit, you shouldn’t assume that it’s an approved charity. When in doubt, you can always access the list of approved charities on the IRS website.
Deductible Legal Services
Because your law firm provides free legal services rather than a cash or property donation, there are limitations on the amount you can include in the firm’s charitable contribution deduction. You can never include the value of your time, such as the hourly rate you bill other clients, nor can you include the salary of associates whom you assign to work with the charitable organization. However, you can deduct the out-of-pocket expenses that directly relate to the provision of free legal services to a charity. This can include the travel and transportation expenses your firm pays for when meeting with representatives from the charity, the court fees the firm pays and all other costs that are necessary to provide the legal assistance.
Reduction for Benefits
When the firm’s motivation for providing a charity with free legal services is purely economic, you cannot deduct any of the firm’s expenses as a charitable contribution. For example, if you provide legal services, and in return you expect that the charity will introduce prospective clients to the firm, you may not deduct these expenses. Likewise, if the charity provides you or other attorneys at your firm with gifts, such as free tickets to expensive charity events or other property that has more than a mere token value, you must reduce the deduction by the value of the benefit any individual in your law firm receives.
Reporting Charitable Deductions
If you operate your law firm as a solo practitioner, you must report your expenses as an itemized deduction on a Schedule A attachment to your personal tax return. However, many law firms operate as partnerships that file an informational tax return on Form 1065 with the IRS. When a partnership provides free legal services and claims a deduction for the related expenses, it must be reported on the 1065. In addition, the deduction is allocated among the partners and reported to each of them on a K-1, regardless of whether they provide services to the charity or not.