A little-known tax benefit: the gift of inventory.

• Author: Ford, Robert

Tax incentives are available for contributions of inventory for the care of the ill, needy, or infants, but many taxpayers may be unaware of them. This item outlines the current rules for an increased deduction and analyzes events leading up to the current rules.

For many years, no tax incentive existed for businesses to donate ordinary income property, such as inventory, to a qualified charity. Donors of appreciated ordinary income property were only permitted to deduct their basis in the property, generally cost, rather than the full fair market value (FMV).

For example, pharmaceutical manufacturers or retail stores may have a "do not sell after" designation for their merchandise, meaning that a manufacturer generally will not distribute the property after a certain date, nor will any retailer sell the items after the expiration date. However, the property could have a useful life for some time after this date. In many instances, destroying the property would provide a greater tax benefit to the owner than contributing it to a charity. Upon destruction, the owner of the outdated property would be entitled to deduct the entire basis of the property as a loss under Sec. 165 or as a deduction through cost of goods sold--clearly, not an incentive to make a donation to a worthy charity.

Various industries and charities have recommended modification of the deduction rules for ordinary income property to Treasury and IRS officials. In 1984, Treasury amended the Sec. 170 regulations to provide a deduction for the contribution of inventory to certain qualified charities equal to the cost of the donated inventory plus one-half the gross profit the property would have generated if sold at its FMV.

Today, incentives are available for contributions of inventory for the care of the ill, needy, or infants, and many taxpayers may be unaware of the increased deduction. Following is an analysis of events leading up to the current rules.

Background

A statutory change enacted in 1962 provided a deduction for contributions of property to a charitable organization equal to the FMV of the property (Sec. 170(e)(1)), providing the sale of such property would have produced long-term capital gain to the donor. An increased deduction was not originally allowed for the contribution of property producing ordinary income because taxpayers in high marginal brackets could possibly receive a greater tax benefit for contributing substantially appreciated property to a...