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Good Karma on a Balance Sheet: Paying for freeware

OK, pop quiz...

For a business, how would an accountant classify a donation made to a freeware author?

If I make a donation of $20 is that classed as a charitable donation?

I have not acquired any assets (e.g. software licenses)

Could you raise a purchase order for that?

Maybe freeware authors could sell overpriced sweets to allow accountants to sleep at night. But I suppose that opens a can of worms for the developer for tax etc.

Somedays I wish I hadn't bothered.

Tim H
Monday, January 19, 2004

Depends where you are? Tax law different in different countries, and indeed states.

Compounding the problem is that DonationWare is another term that means different things to different people.

Does your donation get you anything else?? Addition to authors mailing list? Faster responses to bugs and user support? A thank you link on their website?

Technically, if it does any of these things, you could realistically call it a purchase. The amounts usually involved are too small for your auditors to really care. Just stick it in with software purchases.

If on the other hand, you get Zip/Nada/Nix/Nothing then that's just another can of worms. I might suggest you speaking to an accountant, but again, the amounts involved are so trivial, and his answers probably just as vague that it really is not worth the hassle.

Monday, January 19, 2004

(in the U.S.)

Is the shareware author considered a charitable (U.S. tax provision 501(c) (5) ) organization?

Monday, January 19, 2004

No. I think the money just goes into their beer fund.

Tim H
Monday, January 19, 2004

I was a member my univeristy's home brew club...we were considered a tax exempt organization  :)

Monday, January 19, 2004

Just put it down as a purchase. You paid money, you got something. Some things aren't worht bothering about.

Stephen Jones
Monday, January 19, 2004

IANACPA, but I do run my own business, and I've had the thrilling experience of reading some of the IRS materials about deductibility of business expenses. Since you didn't specify otherwise, and I don't know anything otherwise, I'll assume you're in the U.S.

My recollection is that you can deduct whatever business expeses are both "necessary" and "ordinary". The IRS publications further explain that "necessary" does not mean "mandatory", but something less stringent and more like "helpful and appropriate for your business". "Ordinary" means something like "reasonably usual for companies in the same business".

I'd think you can make a case that the freeware donation is a necessary and ordinary part of doing business. You got a product from the author, you chose to compensate him in order to help ensure that product is maintained and improved. (Well, maybe it was just out of the goodness of your heart, but I'm trying to think of a reasonable business justification.) I would probably argue that this is an expense for software, since that's what you effectively paid for, even if you didn't explicitly get a license in exchange.

Seems like the worst thing that would happen here is that you'd get audited and the IRS would disallow the deduction. Again, I'm no expert and this is not tax advice, but if you can justify your decision with a reasonable reading of the tax law I wouldn't expect the IRS would decide it was abusive and assess ridiculous penalties or anything like that; they'd presumably just say, nope, your bad, give us the x% of the y dollars you deducted.

Of course, if you want to be conservative about it you could just not deduct it at all. You could easily end up spending more time researching this than the deduction itself would be worth, I expect.

John C.
Monday, January 19, 2004

Tim, you make a really good point that freeware authors are making it difficult for businesses to compensate or assist them and thus making it less likely.

Have you considered just asking the original author for a printed invoice mailed to your business in return for your payment? I am guessing that would make everything clear in the event of an audit.

Dennis Atkins
Monday, January 19, 2004

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