We’d like to do some general house cleaning around the pizzeria. Can we get a tax break for donating used equipment and other items to charity?
If the pizzeria operates as a Sole Proprietorship, LLC, Partnership or S Corporation, the amount of the contribution deduction for which you’d qualify would be equal to the fair market value (FMV) of the donated item on the date of its contribution. Simply put, it will equal the estimated price on which a willing buyer and a willing seller would typically agree. However, if the value exceeds $5,000, you’ll need to get a qualified appraisal.
According to IRS rules, when a partnership makes a charitable contribution of appreciated property, a partner reduces his tax basis in the partnership interest by the property’s adjusted basis rather than by the property’s FMV. For example, let’s say a pizzeria with two equal partners donates a 5-year-old freezer that has a zero tax basis due to depreciation deductions over the past five years. If the freezer has a FMV of $500, each partner will receive a charitable deduction of $250. In that case, the appreciation is not recognized for tax purposes and doesn’t reduce their tax basis in the partnership since they had a zero tax basis in the freezer at the date of contribution.
For contributions of food inventory made before January 1, 2012, any restaurateur (except in the case of a C Corporation) can claim an enhanced charitable deduction for donations of “apparently wholesome food” inventory. The total calculated deduction for donations of food inventory may not exceed 10% of the taxpayer’s net income for the year from all of his restaurant operations through which contributions of food are made. For instance, if you had a net income of $50,000 from your restaurant operations last year, your charitable deduction for tax year 2011 would be limited to $5,000.
If your restaurant tax return hasn’t been filed yet, you may still be able to pursue this strategy, which was set to expire at the end of 2011. We hope the IRS will extend this provision into tax year 2012 and beyond.
In general, the restaurateur’s entity records of the donation must include: 1) the name and address of the charity; 2) a detailed description of the donated property; 3) the date and location of donation; 4) the donation’s FMV, how it was determined, and a copy of the appraisal if one was obtained; 5) the property’s cost or tax basis; and 6) the terms or conditions attached to the gift, if any.
How about donating a delivery van to a charity?
For charitable deductions of delivery vans or used trucks, the claimed charitable deduction for the donation is limited to the vehicle’s FMV at the time of donation. Deductions are not allowed for contributions for which the claimed value exceeds $500 unless the restaurant owner substantiates the contribution with a written acknowledgement—to be attached to the restaurant’s tax return—from the recipient. The charity receiving the contribution must provide the acknowledgement to the restaurateur and provide the IRS with the information. The charity must provide this information to the restaurateur within 30 days of the contribution if the charity retains the vehicle for its use.
Again, the tax basis for the partners in the entity will be reduced by any remaining net tax basis still available to the delivery van or used truck that’s donated to the charity.