S-Corp Inventory Donation

[mpserv]

Good afternoon fellow members:

A client of mine plans to donate a large amount of inventory to a charitable entity. My initial research indicates that the tax result is about the same regardless of whether the inventory is donated by the S corp that owns it or is distributed to the shareholder who donates it. I also ran the numbers on a tax return with estimates and it seems to come out the same.

Did anyone find a significant difference? Did I miss the obvious or a subtlety?

Also, if an S-Corporation donates inventory, does it have to recognize gain up to the retail value?

Thanks in advance for your help with this.

Michael P. Servodidio, CPA, ESQ.
279 Main Street
Eastchester, NY 10709
Tel.: 914-337-0696
Fax: 914-779-0383

[Edsel]

Don't Think So

Don't think there would have to be any "gain" recognized by S corp.

The difference between cost and FMV has always been a "twilight zone" for tax purposes, where the imbalance in GAAP treatment is just simply that - an unreconciled difference. I would handle the difference as a Sch M-1 reconciliation item, and on the books I would just credit inventory and charge charity expense at the carrying value of the inventory, not FMV.

The charity "expense" would not be classified as "ordinary income" on page 1 of the return, it would be reflected at FMV as a separately stated item on the K and K-1. This means that the pass through nature of the S corp treats it as if that the shareholder had donated the property himself.

Welcome back - good to have you back on the board!