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!
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
Maybe this will stir up some good discussion:
I have often wondered whether the contributions reflected on the books of most businesses are really contributions. It seems that promotion and recognition of the company name is usually the real reason for the gesture. Therefore, would they better qualify as advertising and promotion under Sec. 162 and 212 rather than simply as “gifts” under 170(c)? What do you think?
Thank you for the article.
You state: “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.”
Whose AGI establishes the limitation? Is it the LLC’s AGI or is it each individual partner’s AGI that is relevant for the limitation?
Well, its that time again…
Regarding the deduction of contributed food… Since my basis is about 32% of the donated food, if I donated (FMV) $100 of food, then my basis would be $32 and the deduction is the lower of ($32+$16=$48) or (2*$32=$64). So the deduction is $48.
All that to ask my question!! My basis has already been deducted. I deducted all the food I purchased as COGS and the labor used to make the contributed food under salaries and wages.
So, now is the deduction still the $48 as “non-cash contributions” or should it only be $16 (because the $32 basis has already been deducted as COGS and salaries)?
Thanks so much!!
Jack
Quick Question: How would donating something like downloaded software come into play? It is not distributed on disk, not delivered in a box, nor any other physical media. (…not in a box, not with a fox, not in a house, not with a mouse…I do not like them Sam I Am….”couldn’t resist”)
Thanks in advance!