Donations of COGS

[Accutax Corp]

Can a sole prop write off his donations and waste of cupcakes they produce? Im thinking only his COGS and thats it. No value can be put if he gives it away or dumps it in the trash if its not sold. Would a Corporation handle it differently?

[JohnH]

No write-off is available. As you said, the cost is already absorbed in COGS, and the deduction is taken automatically via a resulting lower Gross Profit on Sales. Many clients think it's unfair that they aren't able to take a separate deduction for their "lost profit" or "lost time", but the fact is they can't do it and it isn't unfair from an accounting or tax standpoint.

[Accutax Corp]

Thank you for your quick reply.

[Bees Knees]

There are special deductions of certain types of inventory to certain types of organizations for C corporations, in which the C corporation can deduct as a charitable contribution an amount over an above the COGS deduction. But that is for C corporations only...not sole proprietors.

[Nashville]

Real World Reality Check

All of the replies above are true, however:

If you follow the calculation of COGS, all of the inventoriable cost becomes Cost of Goods sold automatically. There has to be a separate accounting (and therefore a reduction to COGS) for any inventory lost due to spoilage, promotion, theft, or any other inventory lost in non-sale fashion.

Donation of cupcakes, whatever, can be considered a withdrawal for personal use, then itemized separately on the owner's Schedule A. Theft of inventory can be considered a withdrawal for personal use, then itemized separately as a business casualty loss, etc.

In other words, inventory whose value expires in any other manner other than sales can be separately tracked and accounted for differently.

In the real world, however, who would want to go to this extra trouble to achieve a deduction that is of less benefit than COGS? And difficult for an auditor to find?

For those clients who insist on deducting the value of inventory for charity, I would allow them to do so. But I would have to lower the COGS by the same amount. The wisdom of this means 1)deduction could be lost entirely by itemized threshhold 2)self-employment tax is increased 3)more itemized erosion if phase-outs return. The entire exercise becomes not only time-consuming but counterproductive.

Such a deduction cannot be BOTH a COGS and a charitable contribution.

[JG EA]

All of the replies above are true, however:

If you follow the calculation of COGS, all of the inventoriable cost becomes Cost of Goods sold automatically. There has to be a separate accounting (and therefore a reduction to COGS) for any inventory lost due to spoilage, promotion, theft, or any other inventory lost in non-sale fashion.

Donation of cupcakes, whatever, can be considered a withdrawal for personal use...,

I understand this, but I am confused about the "spoilage". Wouldn't that just be COG's anyway? Promotion - advertising but still on C. Theft and contributions reported on another form. But do you put spoilage under a separate line item but still on C?

[Nashville]

Non-Sale COGS

There are numerous "things" that fall out in COGS that are not actually "sold"

Spoilage would be one of them. Scrapped merchandise another. Obsolescence due to LOCOM would be yet another. And with various valuation techniques (such as LIFO), the list can go on and on.

And these "things" are legitimate and expected charges to COGS.

The prior discussion seemed to center around designations to inventory that would not be COGS if one were to go to extra trouble and analyze inventory movement. Inventory given to charity. Inventory given away for promotion. Inventory stolen. Inventory taken for personal use. None of these things are really COGS, but few bookkeeping capabilities or procedures go to the trouble of identifying them. And why would any client go to the extra trouble to sift through and end up with deductions that are worth far less than what would otherwise shake out in the COGS calculation?

Making the case for other kinds of deductions may be morally admirable and appeal to purists, but not very "real world."

[DonPriebe]

... And why would any client go to the extra trouble to sift through and end up with deductions that are worth far less than what would otherwise shake out in the COGS calculation? Making the case for other kinds of deductions may be morally admirable and appeal to purists, but not very "real world."

I was the treasurer of a 501(c)(3) food pantry. Every week we would receive several bags of bakery products from a well known national chain. The products themselves were quite edible, but were apparently over-stock or day-old, and not in salable condition. (Envision a 30 gallon clear garbage bag filled with a mixture of bread, bagels, brownies, and jellied donuts.) We took out the loaves of bread and transported the rest to the Rescue Mission, which was running an actual meal program.

Each year around February we would receive a letter from the national office of the company, enclosing a very detailed computerized list of every single thing that we had received, along with its retail price. We were asked to sign a form acknowledging receipt of the donation, and attesting that it was properly recorded on our 990 form. Our response was always a nice letter thanking them for their donation, but explaining that we were in no position to evaluate its worth.

As far as I know the pantry is still getting the donations and the company is still getting the "thank you but ..." letters.