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Preserve an enhanced charitable deduction

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in Small Business Tax,Small Business Tax Deduction Strategies

Several tax breaks for charitable donations by corporations recently expired. It’s not yet clear if any of them will be extended into 2014. But at last one special tax deduction remains on the books.

Strategy: Have your company give inventory to charity. As long as you meet the requirements in the tax law, you can claim an enhanced deduction for the donation. But a new IRS ruling shows it’s not enough to have good intentions. (IRS Chief Counsel Advice 201414014)

Here’s the whole story: Normally, deductions for property donated to charity are limited to the fair market value of the property less the amount that would constitute ordinary income if sold. But a corporation (other than an S corporation) that donates inventory can deduct an amount equal to the basis of property, plus one-half of its unrealized appreciation, up to twice the basis. To qualify for this tax break, the donation must be made for the care of “infants, the ill or needy.”

Facts: XYZ Inc. donated various wrinkle creams, hair gels, perfumes, etc., to a qualified charity. The IRS analyzed the language of the tax code and related regulations to determine if the products were used solely for the care of infants, the ill or needy.

  • An “infant” is defined as a minor child as determined by state law. Care of an infant involves parental functions addressing physical, mental and emotional needs of the infant. The IRS said the donated products didn’t satisfy a genuine need of infants and were luxury items, not necessities.  
  • An “ill person” is defined as someone who requires medical care. For this purpose, medical care is the alleviation or cure of an existing illness, including care of the physical, mental, or emotional needs of the ill. The IRS said the donated products weren’t medical in nature, served no medical purpose and didn’t alleviate or cure an existing illness.
  • A “needy person” is defined as someone who lacks the necessities of life due to suffering poverty or temporary distress. The care of the needy must be for the alleviation or satisfaction of an existing need or a temporary need for shelter and food arising from a natural disaster. The IRS said the donated products had no relation to alleviating or satisfying a necessity of life.

As a result, the IRS concluded that XYZ doesn’t qualify for the enhanced deduction.

Tip: Check with the charity first to confirm available tax benefits for corporate donations.

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