“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.
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.
Selling Price $4.00
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!