contribution of inventory

[JenMO]

Client has a wholesale business. Not selling a lot, but has a large inventory. He wants to donate to a charitable organization and take a deduction. Amount could be in excess of $25,000. Sch A deduction? or if inventory is reduced on Sch C by giving it away, that would be a negative amount on his Sch C. Which was can or should it be done?

[Kram BergGold]

Correct Way

I believe the correct way to handle this, is to remove from inventory as personal and then deduct on Schedule A.

[Kram BergGold]

Clarification

I should have said remove from inventory as personal and then deduct on Schedule A.

[taxxcpa]

Journal Entry

On the company books:
Debit Owner Draw
Credit Inventory

Deduct on Schedule A

[Burke]

or if inventory is reduced on Sch C by giving it away, that would be a negative amount on his Sch C. Which was can or should it be done?

I think I see where you are coming from, but this won't happen. Work through COGS and enter the correct amt on Line 36, even if it is a minus. This should not be reflected as a negative on the Schedule C by reducing gross profit (I think you are assuming he is getting the deduction twice). Then it can be deducted on Sche A.

[JON]

?????

$25,000 need to do apprasial... Is deduction cost or FMV ???????

[JenMO]

As inventory, he is considering cost. Would an appraisal be necessary? If appraisal is necessary, how would this be handled? Would someone actually have to come count (he has lots of little things) and look at invoices?

[JON]

i

believe it is limited to cost for all.but C Corps. If over $5,000 I think you need page 2 made out by a qualified appraisor and donation is limited to the lower of fair market value or cost...

[Burke]

As inventory, he is considering cost. Would an appraisal be necessary? If appraisal is necessary, how would this be handled? Would someone actually have to come count (he has lots of little things) and look at invoices?

FMV is used for appreciated property like stocks or valuables, that which would be given capital gain treatment if sold. You are correct to treat inventory given away at the cost basis for a Schedule A deduction, and in fact, have done so. I assume he can document the actual cost. This should be sufficient. I don't see where an appraisal is necessary unless he doesn't have this information.

[JON]

Burke

agree except I think the "contribution" is recorded at the lessor of cost OR FMV. If at the size previously mentioned - for contribution recording it could make a differnce. Now that may mean you get an ordinary business writeoff for any such reduction to get to FMV.

[JON]

and

do you nto need something from the charity substantiating the donation and the amount - especially if over $5,000

[JenMO]

So, if FMV is less than cost, Sch C would show a deduction, but Sch A would only show FMV of inventory. Still, what about an appraiser? and what kind? A Real estate appraiser would not know FMV, what would qualify as an appraiser for this?

[Burke]

Usually, someone in the same type of business that your client is in, who deals in the same type of inventory.

[mastertaxguy]

CHARITABLE DONATIONS OF INVENTORY/Receipt

Usually, someone in the same type of business that your client is in, who deals in the same type of inventory.

A. Question seems to assume a sole prop.
B. Seems to me that these provisions from IRS Publication 334 would apply to a sole prop situation, but not to a corporation or partnership:

Donation of inventory. If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated 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 contribution deduction from your opening inventory. It is not part of the cost of goods sold.
If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot 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 may apply to certain donations of food inventory. See Publication 526, Charitable Contributions.


Example 1.

You are a calendar year taxpayer who uses an accrual method of accounting. In 2012 you contributed property from inventory to a church. It had a fair market value of $600. The closing inventory at the end of 2011 properly included $400 of costs due to the acquisition of the property, and in 2011, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. The charitable contribution allowed for 2012 is $400 ($600 − $200). The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. The cost of goods sold you use in determining gross income for 2012 must not include the $400. You remove that amount from opening inventory for 2012.


Example 2.

If, in Example 1, you acquired the contributed property in 2012 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2012 and deduct the $50 of administrative and other expenses attributable to the property for that year. You would not be allowed any charitable contribution deduction for the contributed property

Comment:

Someone asked about getting a receipt from the charity. As a practice, it would be wise to advise the taxpayer/client to obtain a detailed receipt from the charity, perhaps with a list of the inventory items being donated, or a "general" receipt acknowledging the specific items on an attached list. Besides, if the items are worth more than $500.00, a receipt is likely going to be required anyway. As Burke and others have frequently pointed out, sometimes it is best to prepare for inevitable audit on such matters.

A few years back, I handled an audit for a single member llc (thus sole prop basically) which donated a ton (literally) of items to a homeless shelter, mostly clothing, some shoes, and related non-food items. The donation was in the mid 2000's, and other than a generalized acknowledgment and some book entries on inventory, TP has no receipt specifically listing the items other than "boxes of socks" and so on. It took much too long to get a satisfactory resolution. TP had sketchy inventory records showing actual purchase or other acquisition of the donated items as well.