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Business charitable donation question. Our company sells

pre-owned medical equipment that we...
Business charitable donation question. Our company sells pre-owned medical equipment that we purchase from various sources. We are a Sub-S corp. We want to donate some equipment to a charitable organization which will help us reduce our tax liability.1. Some pieces of equipment have a value of over $4000. Which according to the IRS form (form 8283) would need an appraisal. Is this correct? Are there any exceptions or any way to avoid the appraisal requirement?2. Does it matter what we actually paid for a specific piece of equipment? For example, if we only paid say $2000 for a piece of equipment and it appraises for $10,000, can we deduct the appraised value or only our cost? On the form it does ask how the item was acquired and cost basis.Please explain how that works. And possibly an example of how the form would be filled out.
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Answered in 5 minutes by:
8/29/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,977
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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1. Any personal property with a claimed deduction of $5,000 or more, Section B of IRS Form 8283 must be completed (including “qualified appraiser’s” and donee’s signatures) and attached to the tax return. A qualified appraisal must be prepared for the donated property.

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I'm so sorry, but there are no exceptions, any return filed with the value over 5K without an appraisal will automatically "Kick-out," and you'll be asked to submit the appraisal or accept the return changed by IRS not showing the deduction at all.

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2. The rule for donations is lower of cost or market. This is a basic premise of cost accounting (and GAAP, and tax). You cannot deduct something for more than your basis (for more than you have IN it).

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I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice on three continents since 1986.

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Customer reply replied 3 months ago
Ok, I am confused. Here is a section directly from the Form 8283. It is an example of a donation of inventory:
So according to this if we paid $1000 for a piece of equipment that is valued at $10000. We would have already deducted the $1000 for COGS and the remaining would be $9000 as the charitable donation. So the deduction amount would definitely be higher then the amount we paid, as is the same in example below (they deducted their COGS plus an additional amount). But you said in your response that we can not do this. Please clarify.Directly from IRS form instructions:
Example. You donated clothing from your inventory for the care of the needy. The clothing cost you $5,000 and your claimed charitable deduction is $8,000. Complete Section A instead of Section B because the difference between the amount you claimed as a charitable deduction and the amount that would have been your COGS deduction is $3,000 ($8,000 – $5,000). Attach a statement to Form 8283 similar to the following:Form 8283—
Contribution deduction
$8,000
COGS (if sold, not donated)
– 5,000
For Form 8283 filing purposes
=$3,000

You are using the rules for a regular corporation (a C-Corp).

...

For non C corporations, the deduction is limited to an amount equal to the lesser of the cost basis or the fair market value of the inventory. Non C corporations do not benefit from the additional deduction for an amount above the cost.

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If a corporation, other than an S corporation, makes a gift of inventory, property held for sale to customers in the ordinary course of business, or depreciable or real property used in the trade or business, it may deduct its basis for the property, plus one-half of the property's unrealized appreciation. The claimed deduction, however, may not exceed twice the basis of the property (section 170(e)(3)).

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But again, this rules does not apply to pass-throughs. An S-Corp works like a partnership in many regards. THe same goes here, with the individual shareholders receiving a k-1 showing their share of any charitable contributions of the corporation.

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This becomes a personal deduction for the shareholders

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Customer reply replied 3 months ago
Thanks for the clarification. So, here an example:We donate a xray machine that we paid $5000 for. That $5000 is already being deducted as COGS on our taxes. We then donate that piece of equipment. Do we still get a deduction for the donation? What would be the amount?

What inventory method do you use. If the equipment is still IN inventory, depending on your inventory method (LIFO, FIFO) it may not yet be a part OF COGS.

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But it that specific piece of inventory has already generated a tax deduction of it's fulll cost, then you have no basis (nothing to deduct).

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To claim a deduction for donated inventory -- defined as products you sell in the ordinary course of your business for income -- you must first have done an opening inventory and accounted for your cost basis in the inventory. Your cost basis is the amount your business paid to manufacture or acquire your inventory. If you have not done an inventory that includes your tax basis, then the IRS will deem you to have a tax basis of zero in your inventory, and you will be prohibited from claiming a charitable deduction.

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Customer reply replied 3 months ago
from what I am understanding there is really no tax benefit to us donating any of our inventory. Would you agree with that statement?
You end up in the same place, either it is deducted as COGS and you sell the item and make a profit, or donate it and the only deduction is the same as would be if it was written off as COGS. And you don't make any profit.

That's exactly right. Deducting it twice would be double dipping.

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C-Corps can do it becasue they are a separate taxable entity and the double taxation (the fact that the corporation pays it's own taxes, then money coming out to shareholders, a lower amount now becasue the C-Corp had to pay it's own taxes, are taxed again) makes this equitable.

...

For the passthrough owner it really would be allowing you to deduct air

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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