Donations
Product Donations

EXPLANATION OF ACCELERATED TAX DEDUCTION

FOR

GIFT IN KIND DONATIONS

Section 170 (e) (3) of the Internal Revenue Code contains an important exception to the general rule that inventory is valued at cost for purposes of certain charitable contribution deductions.

The above section contains an exception that allows a corporation (except S corporations) a deduction equal to the taxpayer's cost basis in the property, plus one-half of the ordinary income element, but no greater than twice the taxpayer's basis.

Section 170 (e) (3) applies to all property described in Internal Revenue Code section 1221 (1) and (2).  Section 1221 (1) includes "stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business..."This would mean that the benefits of section 170 (2) (3) are available to a manufacturer, a retailer, or a distributor for all inventory or stock in trade.

As an example of the way section 170 (e) (3) works, if property is valued at $100 and the taxpayer's cost basis is $50, the taxpayer would be entitled to a deduction of $75, his cost basis of $50 plus one-half of the ordinary income which would have been applied to the property had it been sold.

If on the other hand, a taxpayer donates property with a cost basis of $50 and a fair market value of $200, the amount of the taxpayer's deduction would be $100 (twice the taxpayer's cost basis in the property).

The qualifying donations covered by the rule are to 501 (c) (3) organizations for the use and or care of the ill, needy or infants.  Most product donations by corporations (except S corporations) to Treasures 4 Teachers may qualify for this accelerated deduction.  Please consult your tax advisor regarding the application of these rules to your contribution.