July 19, 2010
Increased Tax Deductions for Inventory Donations of C Corporations
By LLisa Pflomm, Supervisor, Tax & Business
In these trying economic times, businesses are trying to maximize tax deductions. One way corporations can get the benefit of a significant deduction would be to make a donation of inventory to an eligible charity.
C corporations are entitled to an enhanced deduction for a charitable contribution of inventory if the ultimate recipient falls into a special category designated by the Internal Revenue Code Section 170(e)(3)(A).
Generally, a corporation's charitable contribution deduction is limited to 10% of taxable income. However, in the case of a donation of inventory to a charitable organization that uses the property in its exempt function solely for the care of the ill, the needy, or infants, results in a deduction not only for the cost of such inventory, but also for up to half the difference between the inventory's fair market value and its cost, limited to twice the cost.
For example, if the inventory basis is $12,000 and it has a $20,000 fair market value, the deduction will be $16,000.
If the basis was only $6,000 and the value is still $20,000 the deduction would be limited to $12,000, twice the basis of the inventory.
If a corporation is barred from claiming a deduction for a contribution of cash because it has already reached its deduction limitation, the corporation can still achieve the same tax result by donating current inventory.
The inventory donated can take many forms. For example, scrap donated to an organization for recycling that provides disabled individuals vocational work and training opportunities or coats donated to an orphanage. The organization must be a public charity or a private operating foundation as defined within the Internal Revenue Code Section 501(c)(3). The inventory must not be transferred for money, service, or other property. Also, the use of the property must be related to the exempt function of the charity and must not be used to produce unrelated taxable income.
Contributions of books to public schools, grades kindergarten through 12th, can also qualify for the increased deduction. (The school needs to provide a written document that the books are of the proper content and quality for use in the school.)
Special rules apply to donations of food items and we suggest you confer with your tax advisor regarding such a donation.
Eligible entities will be required to submit Form 8283, Noncash-Charitable Contributions. Deductions of more than $ 5,000 will require an authorized representation of the charitable organization to sign the form. In addition, a statement showing the calculations of the increased deduction must also be submitted along with the form.
The authorized representation of the charitable organization should provide a written statement explaining that the property will be used for the care of the ill, needy, or infants and will not be transferred for money, other property or services. One often overlooked benefit of inventory contributions is the waiver of the appraisal requirement that otherwise applies to gifts of property with a value exceeding $5,000. No appraisal is required, but the fair market value should be documented.
Should your C corporation business have excess inventory in which you may be considering donating, we suggest that you contact your MarcumRachlin tax professional.