If you have donated money, clothing and household items, or any other goods to your local Goodwill stores or any other qualified organizations this year, then you may be entitled to a deduction on your taxes. According to the Federal Law, donations to goodwill can qualify as a self-employment (1099) tax deduction as long as you choose the right deduction method.
So, how can you claim a Goodwill tax deduction? In this article, we will explain the types of contributions you can deduct and what organizations you can make deductible charitable contributions to.
We will also go over the IRS requirements to help you get everything ready for your next tax filing.
If you need help estimating your taxes, check out Bonsai’s free self employment tax calculator. We will make this process easier and faster for you.
Let’s begin with the types of organizations that are qualified for tax-deductible contributions:
A qualified charitable organization is defined as a non-profit organization that according to the U.S Treasury, qualifies for tax-exempt status. Organizations must operate exclusively for the established exempt purposes by the IRS (Internal Revenue Service). Some examples are:
Only donations made to qualified charitable organizations are tax-deductible. Monetary support to political parties, campaigns, and action committees will not translate into a charitable donation. These are some other examples of donations that would not qualify for a charitable contribution deduction:
Qualified organizations can receive both cash and non-cash contributions. Let’s review the details of each type of contribution for a better understanding.
Non-cash contributions can be deducted by keeping the records of the property donated to any qualified charitable organization throughout the year. You are able to deduct the fair market value of any household goods, furniture, clothing, shoes, books, etc.
The fair market value is the price a property, business, or other assets would sell for in an open market. Considering both buyer and seller have reasonable knowledge of the asset and are under no pressure of selling or buying. In other words, it is the value of donated items.
There are four factors that can help to determine the fair market value of your donation:
Goodwill also provides a “Value Guide” offering average prices for items in good condition.
For amounts of a minimum of $250 and up to $500, you need a written acknowledgment like a receipt for taxes, donation statement, or letter from the charity.
It must include the name and address of the organization, a description of the property donated, the original cost, and the fair market value of the property at the time of the donation.
To claim a deduction for a non-cash contribution that goes from $500 up to $5,000 you must also complete the IRS Form 8283. This form requires additional information like the means of acquisition (gift, purchase, inheritance, etc.)
In addition to all of the above, non-cash contributions that go over $5,000 you must present a qualified appraisal (monetary value assessment) of the property donated, issued by a qualified appraiser.
Cash contributions include any payment made by check, cash, online payment service, debit or credit card, and electronic funds transfer. Corporations can deduct up to 25% of their taxable income, while individuals can deduct up to 100% of their AGI (Adjusted gross income).
A charitable tax deduction for a cash contribution of $250 or more must be proven by written evidence that includes the name of the organization you made the donation, the date and amount of the contribution.
Contributions are not subject to an amount limitation, but if you made more than one donation of $250 or more, you should have written evidence of each of them provided by the organization. It can be either a separate acknowledgment for each one or one document that shows the total donation including the dates and amount of each.
At the time of filing your independent contractor taxes, you have two options: Standard or itemized deduction. Usually, taxpayers calculate their tax deduction with both options and choose whichever comes up as the highest.
Keep in mind, you can only claim a deduction for charitable contributions if you choose the itemized option. Let’s go over both options for a better understanding:
The standard deduction reduces a fixed dollar amount from the income you are taxed on. It can be different depending on your filing status. The standard deduction amounts in 2021 are:
The itemized deduction also reduces your AGI (adjusted gross income) but it is not based on a set dollar amount. Itemized deductions are calculated by adding up all of the applicable deductions and subtracting that number from your total taxable income.
Applicable deductions include mortgage interest, medical expenses, and of course goodwill donations. Itemized deductions are filed under Form 1040 (Schedule A attachment).
Keep in mind you must have all your tax receipts, including the ones from qualified charitable organizations so you can show them in case of an audit by the IRS. Use Bonsai’s digital tax receipt organizer to help you out.
These are the main points to keep in mind when claiming goodwill tax deductions:
Check out this overview of Bonsai’s Freelance Tax Resources if you need more help managing your self-employment taxes.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?