When Is In-Kind Giving Tax-Deductible?

The IRS regulations when it comes to gifts in kind can be confusing.  But they’re well worth leveraging.  As noted by Brian Mittendorf, Professor of Accounting and MIS at The Ohio State University Fisher School of Business, “The IRS rules are such that a company is likely to see greater tax benefits from donating inventory than from donating cash.”

Tax-deductible-donations

With that in mind, here are a few rules of the road:

To qualify for a tax deduction, donations must go to nonprofits that are listed as 501©(3) organizations and be a public charity or private operating foundation.

If your business is a sole proprietorship, S corporation or partnership, your tax incentive is limited to the item’s (cost) basis.  For example, if the item cost $30 to make and the fair market value [FMV] is $50, the tax deduction is $30.

If your business is a C corporation, you can get a larger tax deduction than the basis if you get a written letter from the charity stating that the donation meets several requirements, including:

  • The donation is being used to care for the financially needy, ill or infants and is used in a manner related to the donee’s exempt purpose.
  • A third party has not used the property unless that use is incidental to the primary use of caring for the ill, needy, or infants
  • Donated property has not been transferred by the donee in exchange for money, other property, or services.
  • The property has satisfied certain requirements of the Federal Food, Drug and Cosmetic Act (if applicable). Compliance is required not only for the time the contribution is made, but for the 180 day period preceding the contribution as well.

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