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Double deductions for special relief efforts

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in Small Business Tax

The new pension law extends through the end of 2007 enhanced deductions originally authorized under the Katrina Emergency Tax Relief Act of 2005 (KETRA). In particular, you can “double up” on certain donations of food and books.

Here’s the drill: KETRA allowed S corporations, partnerships and sole proprietorships to claim enhanced deductions for donations of food inventory. (Previously, only C corporations were eligible.) KETRA also created a charitable deduction for books that C corps donated to public schools.

For both types of donations, the deduction equals the lesser of (1) two times the basis in the property or (2) the basis plus onehalf of the fair-market value (FMV) above the basis.

Example: Say your company donates food inventory with a basis of $1,000. If the goods’ FMV exceeds $3,000, your deduction doubles, to $2,000.

On the other hand, if the FMV is, say, $2,500, the deduction increases to $1,750 ($1,000 basis plus 50 percent of the difference between the $2,500 FMV and the $1,000 basis).

Tip: You don’t have to earmark the donations toward victims of Katrina or any other hurricane.

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