Taxing Definitions

Definition — Enhanced Deduction

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Image Source:  © Radu Razvan Gheorghe, Dreamstime Stock Photos
Image Source:
© Radu Razvan Gheorghe, Dreamstime Stock Photos

Donations of inventory are generally deductible at the lesser of fair market value or your basis in the inventory.

However, if your business is organized as a C corporation, you can claim an enhanced deduction for contributions of inventory or other property when the donations serve a specific purpose, such as helping the ill, the needy, and infants (Internal revenue code section 170(e)). For these “qualified contributions”, you can deduct the basis of the inventory plus half of the profit you would have recognized if you had instead sold the inventory at fair market value.

Treasury Regulation 1.170A-4A contains the following definitions to help determine whether donations qualify for the enhanced deduction.

An ill person is a person who requires medical care. Care of the ill is defined as the alleviation or cure of an existing illness and includes care of the physical, mental, or emotional needs of the ill.

An infant is a minor child as determined under the laws of the jurisdiction in which the child resides. Care of an infant is the performance of parental functions and provision for the physical, mental, and emotional needs of the infant.

A needy person is a person who lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress. Care of the needy is alleviation or satisfaction of an existing need. Since a person may be needy in some respects and not needy in other respects, care of the needy must relate to the particular need that causes the person to be needy.

The question in Chief Counsel Memorandum 201414014 is whether a donation of inventory that included wrinkle creams, hair gels, perfumes, hair sprays, hair texturizers, curling irons, hair dyes, nail polishes, epilators, and hair restoration treatments is eligible for the enhanced deduction.

The taxpayer made the donation to a qualified charity and received a proper receipt.

If you were preparing the return, would you say the donated items are “qualified contributions” for purposes of taking the enhanced deduction?

or

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Right answer!
The donated products are not medical in nature, they serve no medical purpose, and they do not alleviate or cure an existing illness. Therefore, the taxpayer has not shown that the donated products are needed for the care of the ill.

The donated products do not satisfy a bona fide need of infants. The donated products are luxury items rather than necessities of life. Therefore, the taxpayer has not shown that the donated products are needed for the care of an infant or minor child.

The donated products have no relation to alleviating or satisfying a “necessity of life” such as the need for food, clothing, or shelter (or other basic needs). The donated products are luxury items rather than “necessities of life;” they do not alleviate or satisfy an existing need within the meaning of Treas. Reg. § 1.170A-4A(b)(2)(ii)(E). Therefore, the taxpayer has not shown that the donated products are for the care of the needy.

Accordingly, the taxpayer’s contributions are not “qualified contributions” that are eligible for the enhanced deduction because they are not needed for the care of the ill, the needy, or infants.

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