Charitable Contributions of Inventory by Proprietorship

[Super Mom]

Was thinking that if a proprietor donates inventory, the just subtract the cost back out of inventory since no contributions on business side. Then the difference between the cost and FMV will be deducted personally. Am I thinking right? Makes common sense, but IRS does NOT make common sense!!

[smithtax]

I would reduce inventory by the original cost, with no offsetting charge to COS (no double dipping); then charitable deduction of lesser of cost or FMV. Appraisal rules apply if value is greater is $5,000.

[Super Mom]

That's my thoughts. Any others?

[Nashville]

Real World Discussion

The IRS would prefer you reduce your inventory (at cost) for the item and charge the proprietors' personal draw. Remember, charity is NOT a schedule C deduction, thus our reason for charging the personal draw. The amount of the item then becomes a Schedule A deduction instead of a Schedule C deduction. This works in favor of the IRS in the following fashion:
1) The Sch A deduction is not guaranteed, as the taxpayer may not be able to itemize.
2) The Sch A deduction does not reduce self-employment tax, as it would if it were Sch C.
3) This is a non-cash deduction, so additional disclosures have to be made that could disallow the deduction.

The easy thing most people do (whether they admit it or not), is to simply do nothing. When they take inventory at year's end, the item is gone, so it automatically becomes cost of good sold instead of a Sch A deduction. Hence, it reduces the income from Sch C, so it benefits not only income tax but self-employment tax as well. And the beauty of it is there is no additional paperwork or disclosure to bring this about.

In fact, counting inventory and charging to Cost of Goods sold brings about the hiding of a number of questionable deductions, such as personal use, gifts, promotion, and a host of other things. As tax practitioners, we are supposed to uphold the idea of total disclosure, but speaking in the real world, we can't really stop proprietors from washing lost inventory in this manner if they choose to do this without our knowledge.

[taxxcpa]

Contributed inventory

I wonder what kind grocery bills people who own grocery stores have. It probably all ends up in cost of goods sold.

I have a client that has a clothing store. She wanted to take a charitable deduction for donated clothes. As an S-corporation she could do so, but it was be a credit to cost of sales, and a pass-through to her schedule A.

[Jiggers]

I wonder what kind grocery bills people who own grocery stores have. It probably all ends up in cost of goods sold.

I grew up in a "grocery store" family. My dad always told the story about his dad being audited in the late 40's or early 50's. The agent asked my grandfather what he did with the groceries he took home and he responded "I take them home". Well they estimated the personal use and charged him back. Way back then, the amount wasn't very much.

But after that, and even when my dad took over the store on the death of his dad, he always kept track of what he took home and then discounted it by some %, and then paid for them. He kept tract of those payments, just in case he was ever audited.

[JohnH]

Probably could have saved himself some time by just foregoing the record keeping unless an audit came up.

[Roland Slugg]

I concur with smithtax's reply above, except that I would advise my client to charge (i.e. debit) the cost to an account on the business books called "Charitable Contributions." That way it's not forgotten. Then at tax time the contributions go on Schedule A, if the taxpayer itemizes, not on Schedule C. Smithtax was also correct: The charitable deduction is the lower of cost or FMV. If the FMV is higher than cost, the deduction is limited to cost. See Code §170(e)(1)