How do you handle donation requests for your PYOP Studio? We’ll discuss setting up a program that is advantageous for you and the charitable organizations in your area. We’ll also teach you what is deductible for tax purposes and what you need to track.
Bordeaux & Bordeaux CPAs is a Supplier Member of CCSA (Contemporary Ceramic Studios Association) which is a organization representing paint your own pottery studios (PYOP) and ceramic arts businesses. Donna Bordeaux, CPA provided the webinar to CCSA association members as a benefit of their membership in the organization. Their CPA firm specializes in growing PYOP studios with industry specific key performance indicators by helping them grow their studios and minimize the impact of taxes.
Hello and thank you for joining us today. I am Donna Bordeaux from Bordeaux & Bordeaux CPAs and we are going to have a webinar for CCSA members about Demystifying Donations; how to deal with donations requests, as well as recordkeeping for your studio. Let’s go ahead and get started.
First off, I am a CPA who works with pottery studios throughout the country. Our team here is myself, I’m Donna. My husband Chad is also a CPA in our practice and my mom is Nancy. She works with our practice as well. Hopefully you won’t hear it today but sometimes you hear our security force, Dixie, in the background. She sometimes like to be heard as well.
My office physically is in Lake Wylie, South Carolina. I’m just outside of Charlotte, North Carolina, but as we do meetings just like this with all of our clients, we work with studio owners all across the country.
As you can see by our map here, we are probably about two and a half to three hours from the conference that will be held in September in Charleston, so we look forward to being there and meeting all of you as well.
Let’s get started. One of the questions about donations that we commonly hear is how do you choose who you should give a donation to? The second most often heard question is how much should we give? Then the next part, what are the tax consequences? How do I make sure I get all of the justified expense that I should out of donations?
First let’s talk about how to choose. The one thing I recommend is let’s not make this a decision by decision process on each and every person who walks into your studio. Make this easier on yourself, develop a policy and stick to it. Also this will help that your staff can help with you on this donation policy. You can decide, set a budget and you may have to take the difficult road of learning to say no to some folks, and that’s okay. It’s okay to say no. You should say no to some.
In developing a policy, I would suggest that you look at what types of qualifications you would like to have. Now, I’ve heard studio owners say that we give to every single person who asks. We have a standard package and if they ask for it, we just give it. I have others who are pretty choosy about who they donate to. You can find your happy medium here. I would suggest that you make sure that it is a qualified charitable organization so people don’t take advantage of you at any point, and you’re truly giving to a justified cause. We’ll talk about some ways you can verify that in a moment.
The last part again I’ll mention is make this easy for your staff so that they don’t have to refer every single person to you as the owner to verify if and when that person should get a donation and what it should be. Develop a standard package and a policy and just stick to it. That will make life easier for you as well as for your staff.
The other thing I suggest is that you make a written form for requests. First off, this will deter people who may not have the right intentions when they ask for donations. I would consider adding it to your website. It doesn’t have to be on the front page. It can be on a contact page or something like that. You can also offer to request for proof of their non-profit status. By that, every non-profit organization has to apply to the IRS to be classified as a non-profit, or in some cases there are exemptions like schools or churches that do not have to apply to the IRS but they will still have proof that they are a non-profit.
I have provided a few links here in our session of some other companies that do have request forms. Once we publish this you’ll be able to get those links and you can go out and click on those, and you can see the companies that are listed here. Just make it easy for people to ask for that donation and make it easy so that you check back on those and give a written answer. You also help yourself by making sure you have all the information: whether or not that donation will be picked up or mailed, or if you need to call somebody. You should include all of that information right on the form so that you have it.
You can also use this information in your marketing to track where your donations are helping you. If, for example, you’re working with a local school or a local church or daycare and they’ve asked for donations for a specific program. I strongly suggest you mark in all of your customer input. When you add a new customer, always instruct your staff to ask them where they heard about you or why they are there, and it’s pretty obvious if they have a gift certificate with them that you gave to a donation for a silent auction, for example, of where they came from, and then you can track which of those organizations is sending you the most new customers so that you may want to up the ante and give them two or three gift certificates for their next silent auction. So, keep track of this from a marketing perspective as well.
Next, how much should you give. Again, I talked about creating a standard package offering. Use the same criteria that you would for a promotion to decide what should be included. Make sure there’s a goal in mind when you’re giving a donation. Your goals should be to get a new customer to visit your studio or increase your average ticket by maybe having an add-on or something like that. You also want to encourage customers to try alternative services. For example, if your primary effort in your studio is paint your own pottery, perhaps you’ve added canvas and you’d like more people to try that. Or perhaps you’ve added board art and you’d like to invite them to join a class. Maybe that is part of your donation offering that you give a half-price to a class, something like that.
Again, looking to increase your enrollment in classes and summer camps, and also increase customers during your slower times of the year or times of the week. For example, I know a studio owner who just started opening on Mondays and Monday still is a little slow because their customers are not yet trained that they are open on Mondays. People don’t always think of it because they haven’t seen everybody in the world and not everybody is aware that they’re now open on Monday, so perhaps your donation is a Monday night offering or a Monday night class or a Monday night ladies’ night. You can structure your donations just like you would a promotion, to drive that traffic to where you want it to be or to get the goal that you’re looking to obtain for your studio.
Next, what are the tax effects? This is where I get a boatload of questions and a lot of misinformation is out there; pretty easy to understand once you know the rules though.
The IRS allows a deduction for any charitable contribution, whether this is your personal effort or a business effort that is the lesser of your cost for the item or the fair market value. That means you can only deduct what you paid for the item. As a rule, charitable deductions are only a deduction if you have paid tax on the income that was generated to use to provide that charitable contribution, so let’s bring that back to a very simplistic methodology to look at.
If you earn a paycheck at your job and you donate $100 to your church, that $100 went through as taxable income in your paycheck so you paid taxes on it already. Therefore, if you gave the deduction of $100, you are entitled to deduct that back off of your income.
If you did not pay taxes on something, you don’t get to deduct it back. For example, if you received a gift of a car from your grandfather and that car is worth $3000. When you received that gift you did not pay taxes on the value of that car, so if you in turn give that car to a charitable organization, your deduction is zero. You have no basis in that car, meaning you did not pay anything for it, so if we go back and say the lesser of your cost or the fair market value. That means that your cost was zero so that is your deduction.
On the flip side, if you paid $20,000 for a car that you purchased and now it is worth $2,000 and you’d like to donate it to a charitable organization, use the same rule: your donation would be valued at the $2,000. That is the fair market value; the lesser of your cost or the fair market value.
Another example that pertains to studios: if you give away a gift certificate, there is no tax effect except you get to deduct that paper and the toner that you use to provide that gift certificate. You did not give away anything that you paid something for so there is no tax deduction; you just have reduced revenue.
If you painted an item for a silent auction such as the one coming up at the CCSA convention, you may painstakingly put hours of effort into that piece and if you were to go sell it on your own at your studio it might fetch $400 or $500, whatever the price. Your deduction is still limited to your cost or the fair market value, so you cannot deduct the $400 or $500 that it would have fetched if you sold it at your studio. You can only deduct your costs. Your labor is already expensed through your payroll, assuming you’re paying yourself. If you are not paying yourself and giving of your time, your time holds no basis in the eyes of the IRS so you don’t get a deduction for that. The money that you spend on the supplies, the bisque, the paint to get that piece ready to go are already deducted in your cost of goods sold through your studio.
I hope that helps clarify some of the issues that we see with tax deductions based on donations.
I’ll open it up for questions when we’re done here in a few moments if anybody has any specific examples that they would like to have clarified.
I mentioned that our practice works specifically with studio owners. We are specialists in working with that, so donations is just one of the areas that we see a lot of questions and we can help you resolve. There’s some other problems that we commonly have for studio owners and we can help you resolve these as well: issues about pricing, compensation for you and your staff, finding good staff, what should you be looking at in your studio as far as the numbers, what story do the numbers tell? Also, a lot of concerns about leasing and rents and locations. If you have any of those issues, we’d be happy to dive into those deeper with you and help you discover some answers that will help you grow your studio. That’s our main mission is to make sure that our CPSA members have vibrant businesses that are growing and building value for them.
If you have any other questions, I’m going to point you to a few references. Our website is www.PYOPaccounting.com and there if you pop over to our blog you will see a lot of answers to a lot of common questions like donations. We’ve done past webinars on pricing, promotions, payroll. Those are all out there on our blog as well if you’d like to reference those and dig in a little deeper.
Also if you’ve not seen it, we have the “10 Most Expensive Tax Mistakes That Cost Studio Owners Thousands”, which is a copy of our book, and you can also order that right through our website or if you’re going to be at Convention I will have some of those there for you and I’d be happy to provide that to you free of charge.
I want to thank you for joining us today. In just a moment I will turn off our recorded portion of our session and open it up to questions. I’ll stick around a few moments on the line to answer any questions you may have regarding donations. Give me just a moment.