Donating Excess Inventory to Charity

May 24, 2016

Getting rid of excess or obsolete inventory can provide much needed warehouse space.  Some businesses may choose to donate excess inventory to charity. However, it is important to be aware of the tax regulations involved in this type of charitable giving.

A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.

The basis of contributed inventory is any cost incurred for the inventory in an earlier year the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.

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If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.

Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction.

Categories: Non-Profit, Tax Compliance, Tax Planning


IRS Changes Call First Policy for Audits

May 19, 2016

Most taxpayers are familiar with the IRS’ promise of not calling first. The IRS offers this assurance in an effort to combat scammers making unsolicited calls claiming to be IRS officials. However, this pledge has not been entirely accurate and lends to an explanation.

Tirs-logohe IRS made such declaration with regard to phone calls made for the collection of taxes or requests for personal information. However, until recently the Internal Revenue Manual suggested the preferable way to schedule in-person field examinations was to make initial contact through phone calls. The IRS felt it was clear their previous assurance of not calling first related only to collection calls while calls to schedule audits were a completely different function. Unfortunately, the distinction is not as obvious to a taxpayer receiving a cold call from someone claiming to be from the IRS. Distinguishing between the two scenarios may be difficult. In an effort to avoid confusion, the IRS is changing their policy and will now send a notification of audit through the U.S. mail and will follow-up with a subsequent call to schedule an appointment.

This change in policy is the result of various complaints from attendees of a public forum held by the Taxpayer Advocate Service on May 5, 2016. The complaints argued taxpayers has received phone calls from the IRS to schedule audits, which contradicted the IRS’ assurance of never calling first. In response to these complaints, the IRS issued a statement that “in an abundance of caution and in light of pervasive phone scams seeking to extort money from taxpayers, the IRS has decided to adjust this policy for in-person field exams.”

This change in policy means the IRS will no longer make initial contact through phone calls, but will instead only contact taxpayers via for follow-up communication. An IRS Consumer Alertreminds taxpayers that the IRS will never do any of the following over the phone:

  • Demand immediate payment
  • Request you to verify your identity or ask for personal and financial information
  • Ask for credit or debit card numbers
  • Require the use of a specific payment method for your taxes, such as prepaid debit card
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying

If you receive a phone call from someone claiming to be from the IRS that involves any of the above red flags, do not provide any information and hang up immediately. You can then call any of the professionals at William Vaughan Company and we will assist you in determining if you have any obligation to the IRS.

By: Mark Sawyer, CPA

Categories: Other Resources, Tax Compliance