Charitable contributions of inventory by C corporations.

• Author: Lamont, Gregory

C corporations are entitled to a deduction for charitable contributions; however, several limitations apply in determining the deductible amount. The principal restriction, found in Sec. 170(b)(2), is that the deduction for any tax year is limited to 10% of taxable income determined without regard to charitable contributions, special deductions (dividends received deduction, etc.) and net operating and capital loss carry-backs. Charitable contributions in any year are available as a carry-forward to the five successive taxable years. These excess contributions are subject to the same 10% limitation in subsequent years. Cash contributions are subject only to the 10% overall limitation. However, donations in the form of property are subject to additional limitations.

A general principle of charitable contributions is that the deduction for gifts of property other than money is based on the property's fair market value (FMV). Although not specifically mentioned in the law, Regs. Sec. 1.170A- 1(c) states that FMV is the starting point from which the deductible amount is determined after application of the various limitations.

General rule

Sec. 170(e)(1)(A) provides that the deductible amount of a contribution of property is reduced by "the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its f air market value (determined at the time of such contribution)...." Stated differently, the deduction is reduced to the extent that a sale of the property would have produced ordinary income or short-term capital gain. Thus, for contributions of inventory property the amount of the deduction is generally limited to the taxpayer's basis, except for certain qualified contributions under Sec. 170(e)(3).

The question of how the overall 10% of taxable income limitation interacts with a contribution of inventory property is somewhat answered by Regs. Sec. 1.170A-1(c)(4). The regulation splits donated inventory into two components based on the tax year acquired. Any costs and expenses pertaining to the contributed property which were incurred in taxable years preceding the year of contribution and are properly reflected in the opening inventory for the year of contribution must be removed from inventory and are not a part of the cost of goods sold for purposes of determining gross income for the year of contribution. Any costs and expenses pertaining to the contributed property which are...