Inventory donations are a way to support a charity while taking a write-off on unsold or excess goods.
As a general rule of thumb, corporations can deduct inventory donations as a business expense. Sole proprietorships, general partnerships and single member LLCs need to proceed with caution since the mixing of personal deductions and business transactions can create legal liability for the business owners.
In either case, the tax law requires careful documentation of all donations. You’ll need to make sure that you proceed carefully to avoid any sticky tax issues.
Sole Props Can Only Make Personal Donations
Many businesses operate as sole proprietorships, which means that the business has a single owner. The owner reports business income and expenses using Schedule C on the personal income tax return (Form 1040). Other business structures, such as single member limited liability companies (LLC’s) also use Schedule C.
In general, charitable contributions are not allowed as a business expense on Schedule C. It’s possible, however, to donate the inventory as a personal deduction, but you need to handle the transaction carefully.
Assume, for example, that Julie owns Draper Furniture, a company that buys wooden bed frames to manufacture high-end bedroom furniture. Draper carves the bed frames, adds fixtures and stains the wood to make a finished product. Julie operates as a single member LLC, and she would like to donate the excess bed frame inventory to a nursing home.
Don’t Mix Personal and Business Transactions
Donating inventory to a charity requires the owner to think carefully about personal and business transactions. It’s critically important that these activities are kept separate, or else the owner may be exposed to legal liability.
An LLC, for example, provides some legal protections to a business owner, but only if personal and business transactions are kept separated. If the owner pays personal expenses through the business checking account, a court may conclude that the business is not a separate legal entity. That type of decision puts the owner’s personal assets at risk, in the event of a business lawsuit.
To maintain this separation, Julie should write a personal check to the company and buy the inventory, then donate the bed frames as a personal donation. The fair market value of the inventory is reported on Schedule A on the personal tax return. Schedule A includes charitable deductions, along with medical expenses, taxes and other expenses used to calculate itemized deductions.
Noncash donations of $500 or more require the donor (Julie) to complete and file IRS form 8283 (Noncash charitable contributions). Julie will report the name and address of the nursing home and provide a description of the inventory items that are donated. If the donation is worth more than $5,000, Julie may have to get an appraisal of the inventory’s value. Check with a CPA to find out more about this requirement.
Donations Are Simpler for Corporations
If, on the other hand, Draper Furniture operates as a corporation, the inventory donation can be deducted as a business expense. Draper will file form 1120 and pay taxes on company profit. Charitable contributions are a deductible business expense that will reduce the firm’s tax liability.
For donations over $500, Draper must attach a statement to the return describing the type of property contributed and the method used to determine its fair market value. The corporation may also be required to file form 8283.
Company contributions are a primary source of income for many charitable organizations. A business owner should invest the time to properly document a contribution of inventory. Good recordkeeping will support the charitable deduction on the tax return.