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Tax benefits of donating inventory - some donations may also qualify for enhanced deduction.

A merchant or manufacturer C corporation is entitled to an enhanced deduction for a charitable contribution of inventory if the ultimate recipient falls into a special category designated by Sec. 170(e)(3)(A). Contribution 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 (FMV) and its cost, limited to twice the cost. For example, in the case of a retailer donating unsold coats to an orphanage, if the apparel's FMV exceeds its cost, a donation to an orphanage would qualify for the enhanced tax deduction as long as the recipients are below the age of majority.

Generally, a corporation's charitable contribution deduction is limited to 10% of taxable income. However, in the case of a donation of coats for which the enhanced deduction is not claimed, a charitable contribution would not be claimed for the inventory's cost. Instead, the cost of such current inventory items would be treated as part of the corporation's cost of goods sold for the current year. Thus, in the unlikely event that a corporation is otherwise barred from claiming a deduction for a contribution of cash because it has already reached its deduction limitation, it can still achieve the same tax result by donating current inventory.

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.

Coordinated examination issue

The tax adviser should note that, at least for food industry taxpayers, contributions of food inventory for which an enhanced deduction has been claimed is an IRS-coordinated audit issue. An Industry Specialization Paper(ISP) has been prepared on the issue to advise agents of uniform procedures to use in examining returns on which a deduction has been claimed for an inventory contribution of food. Specifically, the ISP advises agents to examine whether the following criteria can be substantiated by the taxpayer claiming the deduction. Other taxpayers would be equally well-advised to maintain sufficient records on this matter.

* The organization that received the donation qualifies as a Sec. 501(c)(3) charitable entity.

* The donor received a written statement representing that the use and disposition of the goods is only for the care of the ill, the needy or infants, and that the donee did not transfer the contributed goods in exchange for money, property or services.

* The donated objects satisfied all applicable Federal and local health and safety requirements,

* The basis of the property contributed must be verified.

* The appreciated value of the property must be verified.

* The ISP states that if the item is a contribution, it should appear as such on the company's return. Otherwise, the proper reduction to cost of goods sold must be made.

* Finally, the agent is advised to determine that the company is not taking a double deduction by reducing the cost of sales for the amount of the contribution and also taking the entire contribution as a deduction reflected on the company's M-1 as an item for tax purposes not reflected on the company's books. Despite the potential for questions during an IRS examination, this idea provides an excellent opportunity to support local charities and receive tax benefits as well. From S. Theodore Reiner, Esq., and Robert A. Midler, Esq., Washington, D.C.
COPYRIGHT 1993 American Institute of CPA's
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Midler, Robert A.
Publication:The Tax Adviser
Date:Jan 1, 1993
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