Schedule C

[Pacun]

There is a similar post on Time donation but I want to start a new one.

What's the rule on this situation?

A teen ager makes a software program with FMV of $3,000. His out of pocket expenses are zero. He donates the program to a non-profit organization. At tax time, the teenager files schedule C and pays his share of SS, he is claimed as a dependent on his parents return, and he deposits $3,000 on his roth IRA. The IRS audits the return and says, you did not have earned income and we are going to refund your SE taxes that you paid but you have to take out the money from your Roth IRA. You are the preparer of the return. What is the answer you send to the IRS?

To me, the teenager cannot file schedule C and none one can say... I choose to file schedule C on this situation because the rules prohibit you from doing it.

For a moment forget that the teenager put money on the Roth IRA, that should not change the rule that prevents the teenager from filing schedule C. I know the IRS will be happy and never audits this return but I want to know the regulation.

Thank you in advance for your responses and keep in mind that our intention is not to offend anyone on this forum, we are here to share and learn.

[Margaret CPA in OH]

I'm a little confused in that you wrote both that the IRS did and did not audit the return. I think your question is whether this is a valid Sch. C. And the answer is laid out in the post about erc's donation. For this teenager, no money was received (you stated that he donated the software) so there is no income to report. With no money received, how could he have funded a Roth and paid SE tax (other than from other sources)? With no expenses other than time (which he cannot deduct), he could not have a deductible contribution or deduct business expenses.

[OldJack]

Had the taxpayer sold the software to the organization and then donated the money to the same organization he would have had a valid tax transaction. The taxpayer would have had Sch-C income and a qualified deductible contribution. He did not do that and as a result he has nothing for tax purposes since he had no cost for the contribution except his time and time is like volunteer labor.