Substantial donation of goods

Technical topics regarding tax preparation.
#1
Andrew  
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My client manufactures and sells products. He ran a special where customers bought 1 item and he would make a charitable donation of the same type item to a charity. The letter of one of the charities says "$18,000" received in donations. Client got the letter from the charity and it has the value in it. Is there anything I need to be aware of with these type of in-kind donations?

"Large quantities. If you contribute a large number of the same item, fair market value is the price at which comparable numbers of the item are being sold.
 

#2
JR1  
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What type of entity? And what's his cost?
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#3
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I don't believe he can deduct FMV unless it's less than the cost.
 

#4
JR1  
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There is some special rule for C corps, I remember.....but yes, usually limited to cost.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#5
Andrew  
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Thanks. Schedule C. Client has a few more donations of same inventory.

What does this mean? "If you donate any inventory item to a charitable organization, the amount of your deductible contribution generally is the FMV of the item, minus any gain you would have realized if you had sold the item at its FMV on the date of the gift". Okay, it sounds like I'm deducting the manufacturing cost from the gain? (Which makes sense because client deducts that on C.)
 

#6
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Andrew wrote:Thanks. Schedule C. Client has a few more donations of same inventory.

What does this mean? "If you donate any inventory item to a charitable organization, the amount of your deductible contribution generally is the FMV of the item, minus any gain you would have realized if you had sold the item at its FMV on the date of the gift". Okay, it sounds like I'm deducting the manufacturing cost from the gain? (Which makes sense because client deducts that on C.)


Sounds like a fancy way of saying lower of cost or FMV.
 

#7
Andrew  
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Are you saying I can only deduct the COGS (which is lower than the FMV) on 8283 ? This is business inventory client currently sells. Haven't dealt with this before.
 

#8
JR1  
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A. You don't have a charity.
B. In the other thread, you said it's already been booked as COGS

If that's true, move on, you're done. He gets a warm feeling and that's it.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#9
Andrew  
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JR1 wrote:A. You don't have a charity.
B. In the other thread, you said it's already been booked as COGS

If that's true, move on, you're done. He gets a warm feeling and that's it.


Thanks. I know my client ... fumes will be coming out of his ears ... this is going to be way more than a warm feeling.
 

#10
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Andrew wrote:Are you saying I can only deduct the COGS (which is lower than the FMV) on 8283 ? This is business inventory client currently sells. Haven't dealt with this before.


There are a few exceptions to this: Food inventory being one. There used to be one for books and computers to schools. Don't have time to look it up right now, but the rule is 'lower of cost or FMV' outside of those very narrow exceptions.

If he is so upset about this, he should have asked the question and received a good answer from a knowledgeable advisor before giving away a bunch of product he'd otherwise sell.
~Captcook
 

#11
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Is it correct that you can only deduct your donations made to a 501(c)3 organization?


Not really. The deduction is governed by Sec 170, with no direct cross-reference to 501(c)(3). But if you’d like, you can put 170(c) and 501(c)(3) side by and see the parallels. Have at it.
 

#12
Frankly  
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Andrew wrote:Client got the letter from the charity and it has the value in it.
Acknowledgement letters from the org should not state value unless the gift was cash. Whatever value stated in an acknowledgment letter for donated goods means nothing. Such letters do not determine value.
IRC 170(f)(8)(B)(i)
 

#13
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Frankly wrote: Such letters do not determine value. IRC 170(f)(8)(B)(i)


I think it's important to state they also don't determine whether and how a deduction is available to the donor.
I've seen acknowledgement letters from NPOs putting a dollar amount on the value of services someone has contributed. There's no deduction for that.
~Captcook
 

#14
Andrew  
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CaptCook wrote:If he is so upset about this, he should have asked the question and received a good answer from a knowledgeable advisor before giving away a bunch of product he'd otherwise sell.


Yes, he never asked me and I would have researched it thoroughly before giving an answer and charged him for tax planning. He wants to skip on professional fees, including a good bookkeeper ... and now he pays the price for it at tax time. I'll remind him of the value of good advice :D
 

#15
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I tell all my new clients that the thing I hate most is to say: I wish I would've known this [insert prior time period here].

It's intentional on my part to set up the conversation of saying: Well, this is why I was hoping to have a planning meeting with you to discover and address items such as this. You know I'm available throughout the whole year and not just at tax time, right?
~Captcook
 

#16
WBR  
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In this example of an $18,000 donation. Let’s assume the product was original purchased for $4,000 and that the business purchased the item in the same year as the donation. Would you not simple reduce purchases shown on the schedule C by $4,000 and then show a charitable donation of $4,000 on the schedule A?
 

#17
DAJCPA  
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WBR wrote:In this example of an $18,000 donation. Let’s assume the product was original purchased for $4,000 and that the business purchased the item in the same year as the donation. Would you not simple reduce purchases shown on the schedule C by $4,000 and then show a charitable donation of $4,000 on the schedule A?


Pub says to deduct as COGS but it is from a Pub so take it for what its worth:

From Pub 526:

Inventory
If you contribute inventory (property you sell in the course of your business), the amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your charitable contribution deduction from your opening inventory. It isn't part of the cost of goods sold.

If the cost of donated inventory isn't included in your opening inventory, the inventory's basis is zero and you can't claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.

A special rule applies to certain donations of food inventory. See Food Inventory , later.
 

#18
EZTAX  
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Easy solution. Book the value of the contribution into sales and, if you have a letter, take the deduction on Schedule A. Show the result to the client. Then tell him you learned of a great loophole that will save him money. Re-do the return with no charitable deduction and just run it through inventory as less inventory remaining at the end of the year. Now you are a hero! Just kidding, sort of.
:)
 


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