Donations to charities

[rob0225]

I own a bagel shop, everyday we have bagels left over, instead of throwing them away, we give them to a local soup kitchen. Am I allowed to deduct the cost of what I would normally sell these for? I was told, I can't because I already deduct the cost of the ingriedients to make them. Just want to verify what I was told is correct.

Thanks,

Robert

[vangogh]

David or Evan will be able to give you a better answer, but I'll try to take a bit of a guess.

It makes sense that you couldn't deduct the cost of the ingredients twice, but I'm thinking you might be able to deduct the other costs involved in making the bagels or even the profit you would make on them.

Another thought is that perhaps deducting the costs on the charity side ends up being the better deduction than the current way you're deducting the costs.

I'm not sure either is right. Like I said it's more a guess than anything else. I'm sure our resident experts will find this thread before too long and give you a better answer.

[Business Attorney]

You may be able to deduct more than your cost. There are special rules for donations of food inventory. See IRS Publication 526 (2009) under the heading "Food Inventory" at Publication 526 (2009), Charitable Contributions (http://www.irs.gov/publications/p526/ar02.html)

IRS Publication 526 includes a worksheet you need to use to compute the amount of your deduction.

[vangogh]

Maybe I wasn't too far off in my guess. I do see this:


If you give property to a qualified organization, you generally can deduct the fair market value of the property at the time of the contribution

Though there are limits.

I wasn't expecting to see this listed


You may be able to deduct as a charitable contribution the reasonable and necessary whaling expenses paid during the year in carrying out sanctioned whaling activities.

Hmm? What would be considered reasonable and necessary whaling expenses for a typical home based service business I wonder?

[Evan]

Vangogh,

Most of the IRS rules don't make sense. All you need to do is have a few strong lobbies in Washington, and sudden laws are made specifically for you.

[Evan]

As David mentioned, you can donate it to charity, but it does require a bit more work than you'd think to claim a charitable deduction. In lieu of this charitable deduction, you will not be able to claim the costs in inventory (you have to subtract it out). That means you need to calculate the its FMV or basis, and subtract that amount from inventory.

FMV or basis? What!? The fair market value is generally your sales price. The basis would be the costs you incurred. If you know what your markup on the bagel is, or what it's actual cost is (approximately), then you're golden. Perhaps you keep track of the costs of inventory used exclusively for bagels, and then you know what you bring in for sales. If you spent $100 in inventory, and that produced X bagels, well, that is your ingredient "cost". You can allocate other reasonable costs, such as labor, which are ordinarily part of COGS.

It's as clear as mud...pie :)

[vangogh]

Most of the IRS rules don't make sense

I notice every year when filling out my taxes. :)

[Evan]

I notice every year when filling out my taxes. :)

Oh, that's the easy stuff... The complicated stuff is all the exceptions!

[vangogh]

It used to be so easy when I had a w2 and filled out the 1040EZ. Now that I'm in business and filling in multiple forms for income and various deductions I see things that make me wonder.

It gets me every year how it's inevitable that the one question I won't understand will be the one question with no instructions. I still can't understand how they can leave out instructions for anything on the forms.

[Evan]

There are no instructions, because the answer is obvious of course... :)

You know where to post your questions if you have issues!

[vangogh]

Funny. Didn't I comment on the lack of instructions last year too? Something tells me I'll comment on them again next year.

I do know where to go for answers. :)

[Evan]

Or if you really wanted to, you could call. "Hey, what does line 10 mean on Schedule C-EZ?" "Umm... There is no line 10 on Schedule C-EZ."

[huggytree]

i would just deduct the full cost you would sell them for...

i give extra faucets & sinks to charity's and my accountant deducts full list price...you shouldnt write things off for less than their full value...your sell price is their value

[Business Attorney]

i would just deduct the full cost you would sell them for...

i give extra faucets & sinks to charity's and my accountant deducts full list price...you shouldnt write things off for less than their full value...your sell price is their value

Sorry, Dave, but that is not the law.

[huggytree]

what is the law?

i cant imagine you are unable to deduct full value of a charity item....

[Evan]

what is the law?

i cant imagine you are unable to deduct full value of a charity item....

See http://www.irs.gov/publications/p526/ar02.html

You are not allowed to deduct the price you sell them for IF you want to claim them as a charitable contribution. First, you would need to subtract out the costs associated with this contribution from COGS.

To determine your charitable contribution, you're essentially allowed the difference between the FMV and your basis (cost) as a contribution.

So if the item cost $20, and it cost you $7 -- you first need to back $7 out of COGS, and then you'd be allowed a contribution of the difference -- generally. There is a worksheet to calculate it, and it's a bit more complex than that, but this sums it up in a bit more palatable method.

If you have no basis (aka it was donated to you) -- then you get no charitable contribution. Further, the deductiblity of charitable contributions is regulated by the Internal Revenue Code, and depending on your net income, the business entity you operate, and the size of your contributions, you may not be able to receive a full tax benefit in the year of the donation.

[Business Attorney]

From IRS Publication 526:

Inventory

If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.

If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.

A special rule applies to certain donations of food inventory. See Food Inventory, later.

[ramirezhenry55]

I think there would be double deductions if thats the case. If you want a bigger deductions, I suggest you just deduct the market value of your donations.