Friday April 19, 2024
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4.5.3 Gifts of Inventory
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Permanent Charitable Tax Extenders
In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.
The four permanent charitable provisions include the following:
1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.
2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.
3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.
4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.
The Charitable Deduction
Generally, gifts of inventory are allowed a deduction equal to cost basis, not fair market value. However, there are a few exceptions to this general rule.
A gift of inventory by a C corporation to a charitable organization may allow the donor to receive a higher than cost basis deduction if the gift has a use related to the charity's exempt purpose and is used solely for the care of the ill, needy or infants. If a gift qualifies under this exception, the deduction is less than fair market value. However, the deduction is not reduced to cost basis as with other inventory gifts. Sec. 170(e)(3)(A)
Instead, the deduction for a gift that meets the above listed requirements is the (1) lesser of one-half of the appreciation in the asset plus cost basis or (2) twice the cost basis.
Example 4.5.3
Good Samaritan Hospital received a gift of 100 stuffed animal bunnies to distribute to sick children in the hospital. The gift came from a large national toy store, Toys 4 U, located near the hospital. The toy store purchased the bunnies to sell in its store, but found that it ordered too many and therefore thought a gift to the hospital would be a kind gesture. The bunnies cost $5.00 each to the store but are sold for $10.00. Ordinarily a gift of inventory allows the donor to take a deduction only at cost basis, or $5,000 (1000 x $5.00) in this case. However, because the gift was to the hospital to be used for the care of ill children, it qualifies for a larger deduction. The deduction is one-half of the appreciation plus cost basis, but not more than twice the cost basis. One-half of the appreciation is $2.50 plus a cost basis of $5.00 allows a $7.50 charitable deduction. The $7.50, however, cannot exceed twice the cost basis. Twice the cost basis is $10.00. Because $7.50 is less than $10.00, Toys 4 U can take a charitable deduction of $7.50 per rabbit, or $750.
C Corporation Must be Donor
The donor of the inventory must be a C corporation to take advantage of this exception and claim a deduction that is higher than cost basis. Further, the charitable organization must be an organization described in Sec. 501(c)(3), exempt from tax under Sec. 501(a) and not a private foundation. The inventory received cannot be in exchange for cash, goods or services. Further, the donee organization must provide the donor with a written statement that the gift has a use related to the charity's exempt purpose, it will solely be used for the care of the ill, needy or infants and no goods or services were received in exchange for the gift.
Related Use Requirement
To qualify for an enhanced deduction under this exception the gift must have a use that is related to the charity's exempt purpose. For example, food donated to a soup kitchen or medical equipment donated to a hospital would qualify as a related use gift.
Solely for the Care of Ill, Needy and Infants
The donation of inventory items must be used for the care of the ill, needy or infants.
An ill person is generally one who requires medical care. Examples include people suffering from physical injury, a person with significant impairment of a bodily organ, a person with an existing handicap whether from birth or later injury, a person suffering from malnutrition, a person with a disease, sickness, or infection that significantly impairs physical health. Also included are people suffering from mental illness or unable to care for themselves, including incapacity due to old age. Reg. 1.170-4A(b)(2)(ii)(A).
A needy person is one who lacks the necessities of life involving physical, mental, or emotional well-being, as a result of poverty or temporary distress. Reg. 1.170-4A(b)(2)(ii)(B). Examples include those who are financially impoverished because of low income, those who temporarily lack food or shelter and people who are victims of natural disasters. Also included are people who are victims of crimes, refugees and immigrants.
An infant is a minor child as determined under the laws of the state of jurisdiction in which the child resides.
Gifts of Food Inventory
C corporations making gifts of inventory to the ill, needy or infants qualify for an enhanced deduction. The amount equals the lesser of cost basis plus one-half the item's appreciation or twice the basis. Sec. 170 (e)(3)(c). In general, a C corporation's charitable contribution deductions for a year may not exceed 10% of the corporation's taxable income. Gifts to be eligible for the enhanced deduction, the contributed property generally must be inventory of the taxpayer, contributed to a charitable organization described in Sec. 501(c)(3) (except for private nonoperating foundations) and the donee must (1) use the property consistent with the donee's exempt purpose solely for the care of the ill, the needy or infants, (2) not transfer the property in exchange for money, other property or services, and (3) provide the taxpayer a written statement that the donee's use of the property will be consistent with such requirements.
Any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim the enhanced deduction up to 15% of entity net income for contributions of "apparently wholesome food." "Apparently wholesome food" is defined as food intended for human consumption that meets all quality and labeling standards imposed by law and regulations even though the food may not be readily marketable. Sec. 170(e)(3)(C).
Farmers and ranchers are an exception to the 15% deduction limit rule. If a qualified farmer or rancher (50% or more of income from farming or ranching) makes gifts of "apparently wholesome food," up to 100% of adjusted gross income may be offset by the value of these food gifts.
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Case Studies on Gifts of Inventory
Gift of Medical Supplies:
Fred and Wilma Sandrock founded a wholesale distribution company years ago. Over the years, they have continued to build up their distribution of many types of supplies. They operate a fleet of delivery vehicles that provides small drug stores and convenience stores with a variety of different types of supplies. Some of the supplies include various basic medicines and medical supplies.
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