Contribution Or Advertising

[Bettie Cheek]

Several clients purchase the prize winning lamb or cow at the fair and rodeo. If it is purchased by the business can this be a deduction as advertising less the fmv of the animal if kept for personal consumption.

[OldJack]

I would say no.

A fair or rodeo is not a charity so there would be no charity contribution.

The sale proceeds were going to the previous owner so there would be no advertising.

The business could not deduct the purchase if the business was not using the animal and it would be a taxable benefit if the owners of the business consumed the animal.

Fair market value would be the purchase price. The fact that it won a ribbon in a contest is immaterial.

[taxmandan]

You said they purchased it at a fair or rodeo. Was the animal a 4-H or FFA project? Usually these are project animals for kids in ag programs and the kids get the money for college. If so, I would consider it advertising as you suggest. They get a write up in the paper and often a prominent display in the 4-H or FFA newsletter for their purchase. Good publicity in a farm community. And the price is often well above the market value of the animal.

[OldJack]

I would consider it advertising as you suggest. They get a write up in the paper and often a prominent display in the 4-H or FFA newsletter for their purchase.

I disagree that it would be an advertising expense (for the purchaser) as the advertising is not significant to the purchase price and the purchaser received the animal.

Using that advertising theory would allow my business to purchase the $200,000 residence built by the vocational school program in my home town and deduct it as advertising expense. I think not.

[Jiggers]

4-H Club or FFA Project as advertising

You do not normally purchase the animal. You are only paying a premium for the project. You usually get your name, including your business name, in the paper. This is advertising.

[OldJack]

You do not normally purchase the animal. You are only paying a premium for the project. You usually get your name, including your business name, in the paper. This is advertising.

The original post said "If it is purchased by the business can this be a deduction as advertising less the fmv of the animal if kept for personal consumption."

What is it about the words purchase and consumption that you don't agree with?

[MomBob]

I agree with Old Jack. The purchase was for consumption, not advertising. It looks good to the community but there is no tax deduction.

[Jiggers]

Advertising

If the animal is kept for consumption, no deduction.

If the animal is kept for breeding purposes, then it goes on the farm depreciation schedule.

If it is just a premium paid by a business, advertising.

If it is just a premium paid by an individual, relative, friend, nada.

[jainen]

What you are saying

>>You usually get your name, including your business name, in the paper. This is advertising.<<

What you are saying is that anything which might make a business look good is deductible. That's similar to the argument multi-level marketers use that everyone is a potential customer so everything is deductible. It doesn't fly. A business expense must have a clear business purpose and be reasonably related to the income generated.

In the original post, the taxpayer is NOT paying the newspaper for coverage. He is buying an animal. General community attention is part of self-created goodwill, an intangible asset with zero basis.

[Luis Mopeo]

Buying community good will is advertising.

There are many cases in tax law where a premium is treated as a deductible expense when the underlying item is not.

I doubt you'll find this situation anywhere in regs, rulings, etc., so you have to apply the facts based on similar items.

If you install an elevator in a personal residence for medical reasons, you can deduct the difference between the cost and the increase in FMV of the home.

If you have a diet prescribed by a doctor that is more expensive than a regular diet, you can deduct the difference.

If a premium was paid for the cow for purposes of enhancing community good will (advertising), sure it's a gray area. I don't understand why so many tax pros are so afraid of gray areas.

Recommend to the client that the premium be deducted as advertising. Let a revenue agent throw it out and deal with it then. Don't put yourself in the role of IRS auditor and automatically throw out anything questionable.

[jainen]

his dandy picture

>>sure it's a gray area<<

No it isn't. The medical expenses you cite are deductible because case law and other authority say they are. Self-created goodwill does not have such authority.

Compare the cost of clothing. Many a professional likes to dress very well, correctly recognizing that this enhances his public image. It's not an advertising expense, though, even if he gets his dandy picture in the paper.

[OldJack]

>>There are many cases in tax law where a premium is treated as a deductible expense when the underlying item is not.<<

I don't believe there is any tax code about deducting so called premiums as such. There is code for the medical deductions you cite but that code is specific and it is a far stretch to try to apply that specific code to anything else. I think the only gray area on this is in your imagination.

[jainen]

I am not afraid

>>I don't understand why so many tax pros are so afraid of gray areas.<<

I am not afraid of "gray areas" but I am wary of the term because too often it is an excuse for poor research.

In spite of my bombastic persona on this forum, I share most accountants' conservative approach to taxation. It is not for me to expose my clients to unnecessary audit risks. I start with standard interpretations, the kind of things you find in Pub 17, which are adequate for the great majority of circumstances.

When appropriate I help the client evaluate alternatives in terms of benefits, risks, and the client's own comfort level. About half of these discussions come from the client's questions. The others are mostly common judgment calls such as hobby loss rules.

My clients are confident that I can deal with any IRS questions, because what you call "gray areas" are well-supported positions in my client's file.

[Luis Mopeo]

>>There is code for the medical deductions you cite but that code is specific and it is a far stretch to try to apply that specific code to anything else. I think the only gray area on this is in your imagination.

There are no code sections dealing with the the specific medical deductions I cited. That's not how the code works. The medical deductions I cited were allowed by IRS rulings or courts' interpretations of the code. It's a matter of applying the specific situation to the code and other substantial authority.

There are countless examples. A charitable contribution is not disqualified if you recieve something from the charity in return. You still get to deduct the amount above FMV. Personal use of a car does not completely disqualify the deduction for purchase, you just get to deduct the business use portion. Just because your gas bill has a "personal consumption" component doesn't disqualify the business percentage as an office in the home deduction.

If a person buys a cow at premium because it will benefit their business from an advertising standpoint, they get the advertising deduction. They don't get the FMV of the Dolly burgers, but they get the amount they paid for advertising, which is the premium. Otherwise, why would they pay more?

[Luis Mopeo]

>>sure it's a gray area<<

No it isn't. The medical expenses you cite are deductible because case law and other authority say they are. Self-created goodwill does not have such authority.

Compare the cost of clothing. Many a professional likes to dress very well, correctly recognizing that this enhances his public image. It's not an advertising expense, though, even if he gets his dandy picture in the paper.

If case law and other authority say a specific item is deductible, it's because a tax professional somewhere took a stand and didn't wait for someone else to make an interpretation. If everybody waited for specific authority for their specific situation, there wouldn't be any court cases or other authority and nothing would be deductible.

You misunderstood what I meant by "good will (two words)." I was not talking about self-created "goodwill." That's a tax term that categorizes the excess amount paid for a business after subtracting amounts for all the other assets. It's not the same thing as establishment of "good will," which is often the reason for a business to purchase advertising. Like, for example, if a business person purchases a prized cow for a premium in order to get good advertising in the local paper. "Goodwill" and "good will" are two entirely different things.