If you've ever worked in a retail shop or own one yourself, you know that the amount of time a good stays on the rack at regular price is extremely limited. In the woman's clothing industry, this can be as little as a couple of weeks. The item then moves to the sales rack with the eventual destination of a liquidator such as Ross Dress for Less, Marshalls or Big Lots.
Of course, the life cycle of arts and crafts inventory is longer. Depending on the type of arts and crafts you make, you may hang onto inventory your entire career. For others the life cycle may be six months to a year. I feel that hanging onto inventory that has passed its peak of freshness is depressing - kind of a daily reminder of what didn't happen. If you've considered donating some excess inventory but weren't sure how it worked, here's a quick guide.
Following Charitable Contribution Rules
First things first, before you make a charitable contribution check your recipient's nonprofit status. Make sure that the nonprofit recipient is included in Internal Revenue Service Publication (IRS) 78 as an eligible charity.
Additionally, there are a plethora of additional IRS charitable contribution administrative requirements - most focus on the dollar amount of the contribution. Make sure you have completely fulfilled your requirements as a donor prior to taking a business expense deduction.
Learning About the Different Types of Arts and Crafts Inventory
Depending on your type of arts and crafts business, you can have four different types of inventory: merchandise, raw materials, work-in-process and finished goods. All four types can be a deductible expense if given to eligible charities.
Figuring the Amount of Your Arts and Crafts Expenses
Cutting through all the in-depth calculations you may have seen in tax guides, for virtually all arts and crafts inventory you'll donate the amount of the deduction will be limited to how much the item cost you even if it's fair market value is higher.
This is because when donating excess arts and crafts inventory, the amount of your deductible contribution generally is the fair market value (FMV) of the item, minus any gain you would have realized if you sold the item at its fair market value on the date you made the donation.
This is very confusing, so let me walk you through it. You own an art gallery and have a pottery vase sitting in your inventory that cost you $50. On December 27, you decide to donate the vase. On that date, the retail price of the vase is $200. Had you sold the vase your profit would be $150 ($200 retail less $50 cost). So what's the amount you can take as a donation? It's $50, which is FMV of $150 less your gain of $100.
Always discuss your inventory donations with your accountant or tax return preparer - especially for inventory that has increased or decreased in value from your cost.
Deciding between Charitable Contributions or Cost of Goods Sold Expense
Your inventory donation can't be both a cost of goods sold expense and a charitable contribution expense. To decide which expense category it falls into following these rules:
- If you purchase and donate your contributed item in the same year, use the guidelines from above to figure the amount you can claim as a deduction. The correct amount is then deducted as cost of goods sold.
- If you purchased the items in a prior year and they are included in your beginning inventory, figure up the amount you can claim as a deduction. Then, Instead of going to cost of goods sold, take this amount as a charitable contribution expense.
Finding out how to Deduct Charitable Contributions
Different business entities deduct charitable contributions differently. For partnerships and S-Corporations, charitable contributions flow through to the investors at their level of ownership and are deducted on their Schedule A. So if you own 50% of an S-Corporation and that corporation made charitable contributions of $350, the amount you deduct on your Schedule A is $175.
Sole proprietorships do not deduct charitable contributions on the Schedule C. They must be taken to the Schedule A.
Regular C-Corporations have a charitable contribution limit of 10% of net income after deducting the charitable contributions. For example, if a corporation makes charitable contributions of $500, they are only able to deduct the entire amount of the charitable contribution if their net income is $5,500. ($5,500 - $500 = $5,000. $5,000 x 10% = $500).
