*“Donate” or “Liquidate?” – **Sample Calculation *

*“Donate” or “Liquidate?” –*

*Sample Calculation*

Under the Internal Revenue Code (IRC), donations of appreciated ordinary income property are deductible when contributed by corporations to charitable organizations. The *U.S. Master Tax Guide (2014), 930.Charitable Contributions of Inventory *code allows qualified businesses an enhanced tax deduction for one half of the difference between the cost to produce the product and the full market value of the donated product.

*Sample Calculation *

Take the sum of one-half of the unrealized appreciation (market value minus cost = appreciation) plus the taxpayer’s cost, but not in excess of twice the cost.

Example:

Selling Price $4.00

Cost $1.00

Gross Profit $3.00

One-half of Gross Profit $1.50

The maximum deduction can never exceed two times the cost ($2.00). The total charitable deduction is now $2.00 versus only deducting $1.00 for the product cost.

To expand this example, let’s assume a retailer has 80,000 returned garments with a Fair Market Value of $45.00 and a cost of $12.00. The added additional tax deduction would be $960,000. At a 35% corporate tax rate, the net effect would be a ** $336,000 savings** to the company.

__Extended FMV__ __Extended Cost__ __Difference__ __Added Tax Deduction __

$3,600,000 $960,000 $2,640,000 $960,000

*A company would have to obtain $6.46/per garment in liquidation in order to justify NOT donating the product.*

Based on the current liquidation value of $ 0.25 to $ 0.95 per garment, corporations are in effect, “leaving money on the table.” In other words, a company just “sold” $4.20 for $0.25 or less!