Can small business tax deductions apply to services offered at a sliding scale for low-income clients?

Thanks for the quick response! That's a bit disappointing to hear. I was hoping there might be some way to classify the difference as a charitable donation or something similar. Do you know if there's any way to structure this differently that might provide some tax advantage? Like maybe setting up a formal charitable program through my practice?

I understand your disappointment, but there are alternative approaches you might consider. One option is to establish a formal relationship with a 501(c)(3) non-profit organization where you could provide services and receive partial payment from them while they subsidize the rest. In that arrangement, you'd report the income you receive, and you could potentially make tax-deductible donations to the non-profit separately. Another approach some therapists use is creating a separate foundation or non-profit entity, though this involves significant setup and administrative overhead that might not be worth it unless you're doing extensive charitable work. The key distinction the IRS makes is that simply charging less isn't a deduction - there needs to be an actual financial transaction or donation to a qualified organization.

That sounds interesting - does it actually give advice on setting up business structures or is it more for calculating existing deductions? I'm a massage therapist with sliding scale rates and my current tax person just keeps telling me "you can't deduct what you don't earn" but I feel like there must be some better way to handle this.

I'm skeptical about AI tax tools. How does it handle state-specific rules? I'm in California and our tax rules are often different from federal guidelines, especially for service-based businesses. Does it address those differences or just give generic advice?

It actually does help with business structure recommendations based on your specific situation. The tool analyzes your income streams, expense categories, and practice model, then suggests optimal arrangements that could include setting up separate entities or forming specific partnerships that maximize tax benefits. For state-specific rules, it's surprisingly robust. When I entered my information, it identified my location and applied California-specific guidelines in my case, highlighting several deductions that are handled differently at the state level. It's not just generic advice - it references specific tax code sections and recent rulings that apply to your exact situation.

How exactly does this work? I thought the IRS phone lines were just permanently jammed. Are you saying this service somehow gets you to the front of the queue?

This sounds like BS honestly. I've literally never been able to reach an actual human at the IRS, and now suddenly there's a magical service that gets through? Seems more likely they just connect you to some random "tax expert" who isn't actually with the IRS.

It's not about skipping the queue - they use an automated system that continually redials and navigates the IRS phone tree until it gets through, then it calls you when it has an agent on the line. It's the same process you would follow manually, just automated so you don't have to spend hours on hold yourself. The service connects you directly to official IRS representatives, not third-party experts. When I used it, I was speaking with an actual IRS employee who verified my information and provided guidance straight from their internal resources. It's just a technological solution to the practical problem of getting through on overloaded phone lines.

That's a really interesting approach! Do you know if the charity has to be specifically related to healthcare? I could see donating to mental health advocacy groups or something similar. Would your sister be willing to share more details about how this arrangement works?

The charity doesn't have to be healthcare-specific, but it needs to be a legitimate 501(c)(3) organization. What makes her arrangement work well is that there's complete separation between the payment for services and the charitable donation - they're not directly tied together, which is important for IRS compliance. The key elements are: charging clients your normal rate (and recording that full income), making separate charitable donations to qualified organizations, and maintaining clear documentation that these are distinct transactions. This avoids the appearance of "quid pro quo" arrangements that might be questioned during an audit. Her patients know she donates to these organizations, but there's no formal arrangement connecting specific payments to specific donations.

I looked into this route - creating a 501(c)(3) requires significant paperwork, ongoing compliance, a separate board of directors, and regular reporting. Unless you're going to get substantial grants or donations, the administrative overhead isn't worth it for most small practitioners. You'd need to be providing at least $50K+ in charitable services annually for the economics to make sense.