column aims to provide you with answers to perplexing questions that arise
in the operation of a non-profit organization. The responses are to be
perceived as guidance and suggestions, and not as legal advice. You should
always seek legal and tax counsel where you feel it is appropriate.
is the tax incentive for businesses donating inventory to our non-profit
organization for distribution to our clients?
creates the tax law and incorporates provisions into the Internal Revenue
Code. Section 170e3 of this code creates an enhanced deduction for businesses
that donate appreciated property. Before the enhanced deduction was put
in place, companies could only deduct an amount equal to their cost for
an item donated to an IRS 501c3 public charity (if the charity did not
resell the item). However, the inventory or other property may have a fair
market value higher than its cost. Under 170e3, an enhanced deduction allows
the donor to take a deduction up to twice the cost/basis of the item if
the value is higher than the cost.
items are donated under 170e3, how must the materials be distributed?
property under 170e3 must be used for the ill, needy or infant (using IRS
definitions). Equipment used by a facility providing service to the needy
also qualifies. The same acknowledgement requirements that apply for any
donations still applies under 170e3 donations. Though materials that are
donated under 170e3 cannot be resold, organizations may charge a "user
fee, handling fee, or donation fee" to recoup their expenses. The occasional
or rare sale to the general public to reduce excess inventory would also
not disqualify the enhanced deduction for the donor.
there incentives to encourage a company to make donation of inventory before
marking down the items?
Contact the company and tell them that they might save money by donating
slow-moving items prior to marking down the price. In addition, the donor
can save the cost of other expenses related to maintaining the inventory,
including the cost of warehousing, handling, and/or disposing of the items.
Create a computation sheet (such as the one below) to show the donor how
the enhanced deduction under 170e3 can benefit them. Your tax advisor can
help with this solicitation.
Market Value (Selling Price) = $1,000
(Cost to Company) = $ 200
= (Difference between FMV and Basis,
"mark up") = $ 800
1: Determine the Gain
$1000 - Basis $200 = $ 800
2: Reduce the deduction to not more than 1/2 the gain
$800 x 1/2 = $ 400
$1000 - 1/2 Gain $400 = $ 600
3: The deduction cannot exceed twice the basis or cost
- 2 x Basis (2 x $200 = $400) = $ 200
4: Add the limitation in Step 1 to the limit in Step 2 and subtract from
the fair market value to determine the deduction
- Gain ($400 + $200) = $ 400
= Twice the Cost
The IRS allows a company to
take up to half the gain (mark-up) on an item, but not more than twice what the
company paid for it.
What Non-Profits Don't Know CAN
By Stuart Sobel
have heard that the Internal Revenue Service (IRS) is putting our organizationís
tax returns on the Internet. Can you explain why and the new procedure
for accessing this information?
IRS, in cooperation with the Philanthropic Research Inc., has created a
website (www.guidestar.org) which has information from Forms 990, IRS Exempt
Organization Tax Return, of organizations throughout the United States.
Before, requests for information were time-consuming and costly. The 1997
forms are on-line and the 1998 information will be added shortly. The IRS
will scan the forms when received at its Ogden, Utah, Service Center and
make the information available to the website provider on CD-ROM.
organization recently changed treasurers and our tax return was filed late.
The IRS sent us a notice with a significant penalty. Should we just pay
the penalty or can the IRS be charitable to a charity?
IRS will send out certain notices automatically, based on specific criteria.
When an organization has made a mistake and it is unintentional, it is
worthy to write a letter to the IRS asking them to abate the penalty. Under
the Internal Revenue Manual, Part 20, Penalties Handbook, it states that
when there is a "reasonable cause" a penalty may be abated. Reasonable
cause could be substantiated by showing that you are operating with a volunteer
board, and during the transition the error was made. Tell the IRS what
has happened. Make sure that you correct the systemic problem and tell
the IRS why the mistake should not happen again. The IRS will review the
history of the organization and most probably see that the event was an
aberration. Do not be afraid to describe the situation and ask for forgiveness.
In most cases the IRS will demonstrate its compassionate side. However,
do not make a habit of being late.
organization has a newsletter. To fund the document and to provide some
financial support for the organization, we are considering accepting advertising.
We will keep the advertising relevant to our mission of distributing donated
materials and not accept inappropriate items. Can the IRS tax us on the
revenue earned, and will we jeopardize our tax-exempt status?
IRS has prepared a very worthwhile publication entitled "Publication 598
Tax on Unrelated Business Income of Exempt Organizations". Order the publication
by calling 800/829-3676 or see the IRS website at www.IRS.gov An organization
is subject to tax on unrelated business income if the income is from a
trade or business which is regularly carried on by the organization and
which is not substantially related to the exempt purpose, except that the
profits are needed from the activity to fund the exempt purpose. "Regularly
carried on" means frequent and continuous and conducted in a manner similar
to a commercial activity. Once a year is not regularly carried on, but
once a month may be.