I handle a lot of this; we have the most not-for-profit organizations per capita, outside of Berkeley CA. What you have is two different perspectives.

For the business person, they should show the FMV of the work performed, and the written off portion is a Discount. That person has not given a contribution; as one of our late friends here taught everyone, "You cannot write off what you never wrote on." So, you either report the Gross Revenue and the adjusted amount as "returns and allowances" or you simply report the amount you truly charged them.

The other perspective is the organization that benefits. They have proof of public/community support and can use these amounts in their financials, presentation, and for matching purposes for grants. Apparently, no one explained to them how to communicate this to their "business donor."