Archive for February, 2012|Monthly archive page

Deducting Services/Goods Your Business Donates

Originally published in the Pacific Grove Hometown Bulletin

February 15, 2012

Every year I inevitably have a few clients that bring in statements from a charity thanking my client’s business for the donation of my client’s services or goods with a fair market value of X dollars.  Of course they want to write it off as a charitable deduction.  The first question I have for them is, “Did you include it in your taxable income, otherwise how many dollars did you actually spend to provide the services or buy the goods donated?”

The answer to the first part is always no!  At that point, if they provided the services themselves, the answer is no deduction.  If they used a hired worker to perform the services – they are already getting a deduction when they deduct the workers’ wage.  For goods or materials donated they will get a deduction when they write off the purchase from the supplier or take inventory.

But why can’t they use the fair market value for the deduction?  The simple answer is you cannot take a deduction for donating theoretical pretax profits!  Compare the woman who donates $100 cash to the man who donates $100 of his time.  Besides the the value of the man’s time being subjective and subject to abuse, the woman’s $100 cash started as approximately $130 of services or $130 of markup on goods, and then she paid $30 of tax, leaving her with $100 to donate.  When she donates it, the taxing authorities give her a deduction to basically rebate her for the $30 in tax she already paid.  The man has not included his $100 in income and has paid no tax, so he has nothing to rebate, and is therefore not entitled to a deduction.

Donations are generally limited to your cost basis in the donation.  However, there are exceptions.  In a future issue, I will discuss why donating appreciated stock is much more effective than donating goods, services, or cash.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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How to Handle Late Documents from Investment Companies This Year

Originally published in the Pacific Grove Hometown Bulletin

February 1, 2012

This year, the IRS put a new demand on investment firms to report the cost basis of stock sales that occurred in 2011.  Next year they will have to report similar information for mutual funds, and the following year for various other securities.  This demand will likely cause these firms to send you their normal tax documents late, or perhaps re-issue documents several times while they sort out this new process.  I have seen one large firm that stated they will not be issuing tax documents until the end of February.

The result of this will likely be a further compression of the already compressed time that tax professionals have to complete the returns for their clients.  If you want to ensure your return is completed by April 17 (the due date this year), you may wish to assume those documents will come late.  Gather everything else and provide to your tax professional early.  Include a note asking they prepare your returns except for the straggling investment company tax documents which you will provide later.  This gets your return in a great position to get it out the door as soon as the information arrives.

One further step may be to request they not file your returns until March 7th or so to lessen the chances that you will need to file an amendment because your investment company re-issued their tax document in late February.  If you are e-filing and sign electronic authorization forms, your tax professional is technically supposed to file the returns within three days of your dated signature.  That said, it would make more sense to sign your e-file authorizations later when you want the returns filed.

If you find yourself in the situation where you file the return and then receive a changed document – discuss it with your tax professional.  The larger the difference, the more likely you are to get a notice down the road.  If you owed more money as a result, you would be subject to interest and penalties at that point (which could be up to three years later and include interest and penalties for the whole time period).  You would need to balance that risk with the cost of amending.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.