Earn a tax break by donating inventory

by Bart Basi

Corporations, like individuals, can deduct charitable contributions to certain organizations. These organizations are generally not-for-profit entities such as charities, churches, educational institutes, etc. A corporation’s charitable contribution deduction is, however, subject to limitations. 

Corporations can deduct up to 10 percent of the corporation’s taxable income. The excess contributions may be carried forward for five years. The questions are, what should a corporation donate and can a corporation obtain a deduction for value in excess of its cost basis? The answers to these questions are inventory and yes. Read on.

Donation limitations
A corporation’s allowable deduction is generally limited to its cost basis in the donated property. However, an exception applies to certain corporate contributions of inventory and other ordinary income property donated to a qualified charity. 

When all applicable requirements are met, a corporation may deduct the cost basis in the contributed property plus one-half of the property’s appreciation in value, so long as the deduction does not exceed twice the property’s basis. This could be better than trying to dispose of obsolete inventory. Give it away and receive a deduction that exceeds your cost basis.

The Internal Revenue Service (IRS) requires that the donee’s use of the property must be related to its tax-exempt purpose or function and the donee must provide the corporation with a written statement to this effect. 

If the donee transfers the contributed property for money, property or service, then the corporation’s deduction will be limited to its basis in the contributed property. 

However, if the corporation can establish, at the time of the contribution, that it reasonably anticipated that the donee’s use of the contributed property would comply with the same use requirement, then the deduction is not restricted to the cost basis.

An example
Suppose ABC Tool & Supply donates power tools with a fair market value of $2,500 to Habitat for Humanity to use in building homes for the needy. ABC’s basis in the inventory is $1,000. 

Since ABC’s donation meets the requirements listed above, its charitable deduction can exceed its basis of $1,000. ABC Tool & Supply can deduct its basis in the power tools ($1,000) plus one-half of the appreciation value ($750) if that total ($1,750) does not exceed two times its basis in the tools ($2,000).  

In this example, the full $1,750 is a tax deduction to ABC Tool & Supply.

As you can see, recording the deduction is quite easy once you have calculated the numbers and adequately understand how the deduction works. Hopefully, this illustration demonstrates a great way reduce a corporation’s tax liability. 

Look at your old inventory, find a school or other non-profit organization that can use it, then make a donation and receive a tax deduction greater than your cost basis.

Services as a deductible donation
The IRS issued a revenue ruling regarding the deductibility of services rendered by corporations to qualified donees. In the ruling, it referenced the following example: Is a newspaper that donates space in its publication to a charitable organization providing a service or making a tax-deductible donation?

The IRS took the position that a newspaper, which gratuitously publishes advertisements for charitable organizations, is not donating property but is merely rendering a service. Therefore, it held that rendering free services does not constitute a tax-deductible donation.

Charitable contributions for corporations can be an excellent avenue to reduce tax liability and get rid of old inventory. Remember, a corporation can deduct only to the extent of 10 percent of its corporate taxable income. 

Bart A. Basi is an expert on closely held companies, an attorney, a certified public accountant and president of the Center for Financial, Legal & Tax Planning Inc. He can be reached at The Center for Financial, Legal & Tax Planning Inc. or visit its Web site at www.taxplanning.com. 

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