Taxpayer asks:
Hi,
I run an ice cream (IC) shop and give away lots of IC to local charities (churches, schools, scout’s, 4H, …). The business is an LLC and I have 2 partners (we all get K-1’s). Can I deduct the retail value of these donations? Obviously, the my cost of the food supplies comes out in the wash (eg its part of COGS).
I’ve been told by a couple CPA’s (who were at the time requesting a “tax deductable” donation) that I could.
If I can deduct it, please explain which line(s)/form(s), and how this flows thru to a K-1.
Thanks so much!!
Taxgirl says:
Wow, this is one of those questions that feels easy but isn’t really.
Here’s the “scoop” (sorry, couldn’t resist):
Most LLCs opt to be treated like a partnership come tax time. Since you receive a Schedule K-1, this means that you’re a partner in one of these LLCs.
Yes, LLCs can take deductions for charitable donations. But the rules are actually a little bit tricky.
For purposes of the LLC, you’ll need to attach a statement to your federal form 1065 that separately identifies the charitable donations by partner and category (by now, you’re probably beginning to understand why partnership tax was my least favorite tax course in law school). Your donation deduction will be limited by AGI (adjusted gross income) limitations - noncash contributions like ice cream will likely be subject to the 50% AGI limitations.
If noncash contributions for similar items (like ice cream) exceeds $5,000, the partnership must give each partner a copy of the federal form 8283, to attach to each partner’s tax return.
There are also separate requirements for donations of “food inventory” - like ice cream. The partnership is required to attach a statement to Schedule K-1 that shows the partner’s “distributive share” of the donation. The food must meet all the quality and labeling standards imposed by federal, state, and local laws and regulations. And - this is the important part to you - the value of the charitable contribution for donated food inventory is not FMV, but rather:
the lesser of (a) the basis (cost) of the donated food plus 1/2 of the appreciation (gain if the donated food were sold at FMV on the date of donation) or (b) twice the basis of the donated food.
Again, getting why I don’t love partnership tax?
As to the Schedule K-1, each partner’s distributive share would be reported in box 13 of the respective Schedule K-1 using the proper codes (your code would likely be C).
Don’t forget that you’ll need a written acknowledgment from the charitable organization that shows the amount of cash contributed, describes any property contributed, and gives an estimate of the value of any goods or services provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the partnership return. You won’t need to attach the acknowledgment but you will need to hang onto it for the partnership’s records.
Hopefully, that all made sense. Good luck - and thanks for being so charitable!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
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