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Friday, May 3, 2024
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Case Studies |
Greenco Inventory Gift I
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Case:
Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. While he was an infant, his parents immigrated to America. He attended high school and State College on the East Coast. After he received an engineering degree, Bill worked for two different companies on the East Coast. He met Clara, married and has two children, Susan and Harry.
Bill worked for companies that produced different types of industrial control systems. One day, he started working on a control system that would measure various kinds of smokestack emissions. Since the Environmental Protection Agency (EPA) was now starting to regulate smokestack emissions, Bill thought it would be a great opportunity.
Bill quit his job, took their life savings and started a manufacturing operation in his garage. He soon hired another engineer and a secretary and set up a C corporation named Greenco, Inc., to produce instruments to measure smokestack emissions. Over the years, Greenco has flourished and grown, and now has 30 employees with customers throughout the nation.
When asked whether Greenco is a good business, Bill responds, "It's a great business. The power companies buy our probes to measure the emissions in their smokestacks. Then the EPA changes the rules! So our customers need to buy updated probes."
Bill has produced the environmental test probes at Greenco, but he also has supported local charities. Bill and Clara regularly support their local relief charity. To support an annual relief campaign, Bill had Greenco give the charity probes with a cost basis of $1,000 and a fair market value of $10,000. The relief charity then sold the probes to a power company that also has been supportive of the charity.
Question:
Can Greenco take a deduction? How much would the deduction be?
Solution:
Greenco has made a gift of inventory. Inventory is property that produces ordinary income when it is sold. If property produces ordinary income, in most cases only the cost basis is deductible.
Because the probes are inventory and Greenco has a basis of $1,000 in the probes, the charitable deduction will be for the cost basis. Greenco will thus qualify for a deduction in the amount of $1,000 for each probe. Reg. 1.170A-1(c)(4). Since Greenco is a C corporation, the deduction is also limited to 10% of taxable income.
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