Questions Answered About Tax Rules Concerning Product Donations
If you have been contemplating making a product donation to the Kids In Need Resource Centers, the following information may answer some questions you may have about the applicable tax rules. To make a product donation, please call Jennifer Lehman, donor relations manager , at +1.937.296.1230.
Is a tax deduction permitted for donations of inventory?
The general rule is that a taxpayer is allowed a charitable contribution deduction only for an amount equal to the taxpayer's basis in the inventory of product contributed to a 501 (c)(3) nonprofit organization. Inventory is defined as the assets held by a taxpayer for sale to customers in the ordinary course of a trade or business. Those assets when sold yield ordinary income. The basis of product contributed from inventory is defined as all costs incurred in providing, manufacturing, acquiring, or holding product for resale to others.
The value of inventory items contributed to a charitable organization must be reduced by the amount of ordinary income that would have been realized had the items been sold. Double deductions under different provisions of the law are not allowed. If inventory is deducted as a charitable contribution, it cannot be deducted again as part of the donor's cost of goods sold. If inventory is contributed in the same taxable year it was created or acquired, no charitable deduction is allowed. However, the cost of the contributed inventory can be deducted as part of the costs of goods sold.
How much can a corporation give?
The corporation's deduction for charitable contributions for any year cannot exceed ten percent (10%) of taxable income. However, any "excess" can be carried forward and applied for the next five years, subject to the 10% rule for each carryover year.
Can the tax deduction for in-kind gifts ever exceed cost?
A special rule known as IRC 170(e)(3)(B) was added to the Tax Reform Act of 1976 to make it financially attractive for businesses to help nonprofits with donations of free merchandise. It established special tax deductions available only to (c) corporations (manufacturers and distributors) that make donations of current inventory to educational and other tax-exempt 501 (c)(3) nonprofit organizations that also meet the requirements of IRC 170(e)(3) or IRC 170 (e)(4).
This rule is significant, for with it, corporations may deduct the lesser of their tax cost basis plus one half of the difference between the cost and the market value or twice the cost basis. This deduction is subject to all of the conditions being met.
What types of goods can be donated under Section 170(e)(3)?
All forms of inventory are allowed. Virtually anything made or distributed by a corporation is a potential gift, as long as it is new or reconditioned to new.
Who can receive these gifts?
To obtain the special tax incentive of IRC 170(e)(3)(B), donations must be made to nonprofit, tax-exempt 501(c)(3) organizations for the benefit of the ill, needy, or infants (minors) [IRC 170(e)(3)], the purpose for which the 501(c)(3) organization was given tax-exempt status. Donations can be made either directly to the individual nonprofit organizations or to legally sanctioned nonprofit organizations designed to receive merchandise in large volume for redistribution to their qualified nonprofit organizations.
More Information
Please visit the IRS website for more information.
