Tax Calculation of New South West Grocer Contribution to a Charitable Organization
Can Southwest Company Claim Charitable Deduction From its Contributions?
The purpose of this study was to learn about the tax impact of donation to charitable organizations on businesses and individuals. Donations to charitable organizations are guided by the 26 U.S. Code § 170. Taxation calculation is an important requirement for all businesses and individuals in the US. In fact, some individuals have unknowingly violated this rule such as in the Durden v. Commissioner case (United States Tax Court).
The US government allows for the deduction of contributions from the income statements of up to 50% of the gross income if these donations are made to qualified organizations. In addition, these donations must be made in cash or in the form of assets before the end of a taxable year of the company (26 U.S. Code § 170). In class C corporations, the due date of a company is the 15th date of the third month after the end of its tax year. A corporation’s tax year is determined by the time when a corporation files its first tax return. A charity organization, such as the one that Southwest Grocers is donating to is a qualified organization. Ordinarily, the fair market value of contributed donations is the one that determines the amount that will be deducted from the gross income (Internal Revenue Service, IRS 4-10). However, in the contribution of inventories, special rules apply which determine if the donations will be deducted from the gross income. In the contributions of inventories, the amount that can be deducted is the smaller of its basis or fair market value.
The basis of an inventory simply refers to the costs incurred in an asset in the year or at the time of its acquisition. Notably, all donations must be deducted from the amount of cost of goods sold in order to determine the actual income that a business has made. In order for food donations to qualify for deductions, the donation must be a wholesome food. Wholesome food simply means a meal that is intended for human consumption and meets all the quality and labeling standards that have been established by the local and federal laws and regulations (IRS 4-10). Therefore, although the food donation from New Southwest grocer is not readily marketable due to appearance, freshness, grade, and age, it is still wholesome food.
The charitable organization must use the food donation to care for the needy, the ill, and infants. The food donation must be used for the organization’s main objective and intended purpose. In addition, the organization should not exchange the food for money, other forms of assets, or services. The charitable organization must also write a statement to New Southwest grocer confirming that it will obey the aforementioned requirements. Further, the charitable organization should not be a privately non-operating foundation. Finally, the food must satisfy all the requirements of the Federal Food, Drug, and Cosmetic Act and regulations on the date of transfer as well as 180 days before the transfer date (IRS 4-10). If these conditions are met, these donations will qualify for deductions from the company’s net income.
To sum up, if the donations will be done to a charitable organization, New Southwest Grocer can qualify for these deductions from its incomes. However, the amount that qualifies is limited to only 50% of its net income and the lower of the fair value and its basis. In addition, New Southwest must ensure that the company has used the donated items according to the IRS regulations. In this manner, the company will be able to avoid penalties that may be occasioned by improper calculations of tax deductions.
Internal Revenue Service, IRS. Charitable Contributions, Publication 526, Cat . No. 15050A. pp. 1-22. (2015).
United States Tax Court. T.C. Memo. 2012-140. David P. Durden and Veronda L. Durden, Petitioners V. Commissioner of Internal Revenue, Respondent. Docket No. 17441-09. (2012).