It's the holiday season, and once again it seems as if everyone's got their hands out. Just think of those legions of Santas ringing their bells and collecting cash in big red pots. Then think of the IRS' rather tiresome decree that a canceled check isn't good enough as a receipt for a charitable donation. It's enough to make even the most generous turn into Scrooge.
While individual tax rules seem uncharitable, the rules for corporations are another story. Give away inventory, and the IRS will actually encourage those charitable thoughts of yours.
How can this be? Well, according to Martin Greif, a tax partner with the accounting and consulting firm Goldstein, Golub, Kessler and Co. in New York City, there is a special provision in the tax code that allows corporations to take a deduction for more than their cost basis if the items are donated to charity. So instead of letting your excess inventory depreciate until it's worth nothing to you or anybody else, you can make a donation to a worthy charity and improve your cash flow at the same time.
Greif explains: The normal rule for donation of inventory is that you're limited to deducting your cost basis and you're capped at donating 10 percent of your taxable income. "But there is another way," he says. "If you donate your goods to a worthy charity, you get to take a deduction equal to your cost plus half the difference between your cost and the retail price of the merchandise."
Specifically, IRS Code Section 170(e)(3) allows a special exception for property donated to "eligible recipients" and to be used solely for the care of the ill, needy or infants. This means the charity you select to receive your inventory must be a 501(c)(3) organization--that is, a nonprofit organization that helps the ill, needy or infants. It can't be a private art foundation, for example, that wants your excess paintbrushes. And the organization has to use what you give them--no bartering, trading or selling of the merchandise is allowed. They'll also need to give you a written statement declaring that they'll use the merchandise for its intended purpose, which you must include with your tax return.
"The next catch," says Greif, "is that you have to be a corporation to use this exception. Partnerships and S corporations need not apply."
And, of course, there are rules limiting the amount you can deduct over your cost basis. Here's an example: Let's say it costs you $100 to make a bicycle, which you then sell for $400. Under the general rule for donations, you're limited to a deduction of $100 per bicycle up to 10 percent of your taxable income.
However, this special exception allows you to take your $100 cost basis plus half of $300 (your retail mark-up), or $150, for a total deduction of $250 per bicycle. But, says Greif, you're allowed no more than twice your cost basis, so your deduction would actually be limited to $200 per bicycle (2 [yen] $100 basis). "You can see how this works better with higher profit-margin items," he says. Still, even for a box of tissues, deducting your cost plus 50 percent is nothing to sneeze at.
And, returning to the bicycle example, should donating 50 bicycles put you over 10 percent of your taxable income, you can get a carry-over of the excess for the year of donation plus the next five years.
Still more good news: If your generous heart wants to make a donation but you don't yet know how your year's going to finish out, there's even a provision in Section 170 that allows the board of directors to elect to make a charitable donation, specified as a percentage of taxable income, then not follow through on it for two and a half months. For example, Greif says, at the December 31 board meeting, the directors could authorize a charitable donation in the amount of 10 percent of taxable income. They would then have 75 days, or until March 15, to actually donate the inventory.