Discussion:Donation of inventory

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Accounting Questions --> Donation of inventory


Nshnider (talk|edits) said:

2 July 2013
I have a co that sold $1,000 at retail to a charity. They paid $300 and agreed on a donation of the remainder of $700. at the time of sale the JE was

COGS was dr for $600, Inventory was CR for $600 A/R was DR for $1000, Income CR $1000 Cash Dr $300, A/R CR $300 Donation Exp DR $700, A/R CR $700

If this is correct than the income negates the donation What is wrong here Neil

Fr. Mackelhenry (talk|edits) said:

2 July 2013
Think of all the inventory in the world. And out of all of this stuff your client chose just this inventory to have on hand. That is the expertise involved here. I'm surprised the client stopped at $700, he could have probably tacked another 200.00 worth of expertise on to the donation.

Nshnider (talk|edits) said:

2 July 2013
Put is the JE????

Nshnider (talk|edits) said:

2 July 2013
I didn't COGS was 600 and sold for 1000

Nshnider (talk|edits) said:

2 July 2013
how would you treat the above transaction

JR1 (talk|edits) said:

July 2, 2013
Cr. Sales 1000.00

Dr. AR 300.00 Dr. Charitable 700.00

Dr. COGS 600.00 Cr. Inventory 600.00

Laketahoecpa (talk|edits) said:

2 July 2013
It didn't sell for $1,000. It sold for $300. Don't believe you can take deduction for FMV when you donate inventory - limited to cost (there are exceptions for particular types of inventory donated to particular types of organizations).

If this was my client, I would record the sale for $300 and then expense the $600 cost of inventory through COGS. Or I guess you could dr COGS for $300 and Charitable Deduction for $300.

Ckenefick (talk|edits) said:

2 July 2013
Debit A/R $300, debit Charity $420, debit COGS $180. Total debits equal $900.

Credit Inventory $600, credit Income $300. Total credits equal $900.

Charitable deduction is $420. Net gain is the $300 Income amounts less the $180 in COGS, or $120.

You have a bargain sale to charity of ordinary income property.

Ckenefick (talk|edits) said:

2 July 2013
If this was my client, I would record the sale for $300 and then expense the $600 cost of inventory through COGS. Or I guess you could dr COGS for $300 and Charitable Deduction for $300.

Net deduction under Tahoe's math is $300, which is the same that I get [$420 charitable less $120 gain].

Ckenefick (talk|edits) said:

2 July 2013
FYI - I'm working off of Example 4 from 1.1011-2(c):

Example (4). In 1970, B, a calendar-year individual taxpayer, sells to a church for $2,000 stock held for not more than 6 months which has an adjusted basis of $4,000 and a fair market value of $10,000. B's contribution base for 1970, as defined in section 170(b)(1)(F), is $20,000 and during such year B makes no other charitable contributions. Thus, he makes a charitable contribution to the church of $8,000 ($10,000 value--$2,000 amount realized). Under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $800 ($4,000 adjusted basis X $2,000 amount realized/ $10,000 value of stock). Accordingly, B, has a recognized short-term capital gain of $1,200 ($2,000 amount realized--$800 adjusted basis) on the bargain sale. After applying section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of §1.170A-4, B is allowed a charitable contributions deduction for 1970 of $3,200 ($8,000 value of gift--[$8,000--($4,000 adjusted basis of property X $8,000 value of gift/$10,000 value of property)]).

You will see that the above example dovetails with Example 7 from 1.170A-4:

Example (7). In 1970, H, an individual calendar-year taxpayer, sells to a church for $2,000 stock held for not more than 6 months which has an adjusted basis of $4,000 and a fair market value of $10,000. H's contribution base for 1970 is $20,000, and H makes no other charitable contributions in 1970. Thus, H makes a charitable contribution to the church of $8,000 ($10,000 − $2,000 amount realized), which is 80% of the value of the property. The amount realized on the bargain sale is 20% ($2,000/$10,000) of the value of the property. In applying section 1011(b) to the bargain sale, adjusted basis in the amount of $800 ($4,000 adjusted basis × 20%) is allocated under §1.1011-2(b) to the noncontributed portion of the property, and H recognizes $1,200 ($2,000 amount realized less $800 adjusted basis) of ordinary income. Under paragraphs (a)(1) and (c)(2)(i) of this section, H's contribution of $8,000 is reduced by $4,800 ($8,000 − [$4,000 adjusted basis × 80%] ) (i.e., the amount of ordinary income that would have been recognized on the contributed portion had the property been sold). The reduced contribution of $3,200 consists of the portion ($4,000 × 80%) of the adjusted basis not allocated to the noncontributed portion of the property. That is, the reduced contribution consists of the portion of the adjusted basis allocated to the contributed portion. Under sections 1012 and 1015(a) the basis of the property to the church is $5,200 ($2,000 + 3,200).

Frankly (talk|edits) said:

2 July 2013
The business can claim as a charitable donation of the lesser of FMV or basis. This sounds like a bargain sale, thus the contribution is first limited to $700, (the FMV less the $300 paid). The contribution is further limited by the basis of the inventory sold. If the basis is $600, only 70% of it was contributed, thus the basis of the contribution is $600 * 700/1000 = $420. $420 is deductible.

Tax Writer (talk|edits) said:

3 July 2013
Isn't there an exception for food inventory and some exceptions for electronics/computers? The donation can be booked out at FMV, Remember seeing it in my QuickFinder last year but I don't remember all the details. Maybe only applies to C Corps. I'll try to look it up.

Tax Writer (talk|edits) said:

3 July 2013
Okay, it only applies to C Corps, Sec 170(e)(3)(C), and I can't tell if the provision was still available in 2012.

Ckenefick (talk|edits) said:

3 July 2013
Yes, there is. 170(e)(3)(c). Through '13, restaurant rules still apply to non-c-corp's. Basis + 1/2 of appreciation OR 2x basis...whichever is less.

Nshnider (talk|edits) said:

3 July 2013
In all of the examples above, the net effect of reduction in NI is 0 because income has to be recognized. If you will follow this

Dr Donation 700 Cr Income 700

(Now the company has to report a 0 NI due to the income recognized but there was not any income just the donation therefore the net effect was 0 where it should have been a -700) Then move the inventory to COGS Dr COGS Cr Inventory

In reality there was NOT any income so how would you balance the JE?

Ckenefick (talk|edits) said:

3 July 2013
In case whatever tangent you're going off on now can't be journalized, consider Schedule M1.

Kevinh5 (talk|edits) said:

3 July 2013
I thought you wrote that the customer/charity paid $300. Now you're saying they didn't pay anything.

Ckenefick (talk|edits) said:

3 July 2013
He is so all over the place with this. I really don't know what he is saying. Old people tend to do this. You show them the way, but they refuse to open their mind up to new ideas and thoughts, keep wanting to do things their own way without changing their incorrect understanding of things.

Nshnider (talk|edits) said:

3 July 2013
My point is that the income cancels out the donation deduction even if there is a 300 payment, the income side cancels the deduction

Kevinh5 (talk|edits) said:

3 July 2013
Yes. They didn't write a check for the donation, did they? What were you expecting?

By the way, you've already recognized the 'loss' when you make your COGS entry. I'm no CPA like you are, but perhaps if you wanted to make a point, you would adjust part of that 'loss' out of COGS and into 'Contributions', if it really is important to your client. As in 70% x $600. Which is exactly the same conclusion that Frankly came to way up above. By the way, Frankly is not a CPA either. I am certain that he/she will pass the EA exam. Good thinking, Frankly!

Podolin (talk|edits) said:

3 July 2013
Old people tend to do this. I rep-resent that!

Frankly (talk|edits) said:

4 July 2013
Thank you Mr. Kevin. There were others too that recognized the bargain sale angle. I learned about that in studying for the EA tests. Expect to sit for part III next month. After that, no excuses for being wrong.

To join in on this discussion, you must first log in.
Personal tools