Inventory Manufacturing Tax Tips: An inventory is necessary to
clearly show income when the production, purchase, or sale of
merchandise is an income-producing factor. If you must account for
an inventory in your business, you must use an accrual method of
accounting for your purchases and sales. To figure taxable income,
you must value your inventory at the beginning and end of each tax
year. To determine the value, you need a method for identifying the
items in your inventory and a method for valuing these items. The
rules for valuing inventory cannot be the same for all kinds of
businesses. The method you use must conform to generally accepted
accounting principles for similar businesses and must clearly
reflect income. Your inventory practices must be consistent from
year to year.
This information below has been updated12/18/13.
The regulations are subject to change. Please contact the Internal
Revenue Service for clarification regarding their policies etc. If
you find that this information becomes out dated, please let us know.
Inventory of apparel and accessories can be turned
into a federal tax deduction if a business donates it to charity, according
to the National Association for the Exchange of Industrial Resources (NAEIR).
This deduction is claimed under the section 170 (e) (3) of the U.S. Internal
Revenue Code, can be as much as twice the original cost. A free guide
that details the donation process as well as a formula for calculating your
company's potential tax savings is available by contacting NAEIR by phone
at 800 562-0955 or their web site.
NAEIR was founded in January, 1977 by Norbert C. Smith,
a former aircraft parts manufacturing executive. While working as a charitable
gifts consultant to major corporations, he discovered that many companies
have millions of dollars worth of new, excess inventory in their warehouses.
A new tax regulation, adopted a year earlier, would provide corporations
with a federal income tax deduction for donating those goods to qualified
schools and nonprofit organizations. Mr. Smith founded NAEIR to secure those
products and channel them to organizations that need them. Since NAEIR's
founding, it has collected and redistributed over $2 billion worth of new,
donated supplies and equipment. Under Internal Revenue Code Section 170(e)(3),
materials received through NAEIR are to be used for the care of the ill,
needy or minors, and may not be bartered, traded or sold. The products may
be used to further the recipient organization's mission, and in its everyday
operations. Donor companies have included such well-known firms as 3M, Snap-On,
Avery Dennison, E.K. Success, Black & Decker, Russ Berrie, The Stanley
Works, Delta Faucet, Department 56 and many of
other manufacturers, wholesalers and distributors.
Below you will find additional information that
may be of assistance:
If you donate any inventory item to a charitable
organization, the amount of your deductible contribution generally is the
Fair Market Value (FMV) of the item, minus any gain you would have realized
if you had sold the item at its FMV on the date of the gift. For more information,
see Publication 526.
Used clothing and other personal items are usually
worth far less than the price you paid for them. Valuation of items of clothing
does not lend itself to fixed formulas or methods.
The price that buyers of used items actually pay
in used clothing stores, such as consignment or thrift shops, is an indication
of the value.
You cannot take a deduction for clothing donated
after August 17, 2006, unless it is in good used condition or better. An
item of clothing that is not in good used condition or better for which
you take a deduction of more than $500 requires a qualified appraisal. See
Deduction over $500 for certain clothing or household items, later.
For valuable furs or very expensive gowns, a Form
8283 may have to be sent with your tax return.
Jewelry and Gems
Jewelry and gems are of such a specialized nature
that it is almost always necessary to get an appraisal by a specialized
jewelry appraiser. The appraisal should describe, among other things, the
style of the jewelry, the cut and setting of the gem, and whether it is
now in fashion. If not in fashion, the possibility of having the property
redesigned, recut, or reset should be reported in the appraisal. The stone's
coloring, weight, cut, brilliance, and flaws should be reported and analyzed.
Sentimental personal value has no effect on FMV. But if the jewelry was
owned by a famous person, its value might increase.
To figure how much you may deduct for property that
you contribute, you must first determine its fair market value on the date
of the contribution.
Fair market value. Fair
market value (FMV) is the price that property would sell for on the open
market. It is the price that would be agreed on between a willing buyer
and a willing seller, with neither being required to act, and both having
reasonable knowledge of the relevant facts. If you put a restriction on
the use of property you donate, the FMV must reflect that restriction.
If you give used clothing to the
Salvation Army, the FMV would be the price that typical buyers actually
pay for clothing of this age, condition, style, and use. Usually, such items
are worth far less than what you paid for them.
If you donate land and restrict its
use to agricultural purposes, you must value the land at its value for agricultural
purposes, even though it would have a higher FMV if it were not restricted.
In making and supporting
the valuation of property, all factors affecting value are relevant and
must be considered. These include:
The cost or selling price of
Sales of comparable properties,
Replacement cost, and
Opinions of experts.
These factors are
discussed later. Also, see Table 1
for a summary of questions to ask as you consider each factor.
Fair Market Value
Determining the value of donated
property would be a simple matter if you could rely only on fixed formulas,
rules, or methods. Usually it is not that simple. Using such formulas, etc.,
seldom results in an acceptable determination of FMV. There is no single
formula that always applies when determining the value of property.
This is not to say that a valuation
is only guesswork. You must consider all the facts and circumstances connected
with the property, such as its desirability, use, and scarcity.
For example, donated furniture should
not be evaluated at some fixed rate such as 15% of the cost of new replacement
furniture. When the furniture is contributed, it may be out of style or
in poor condition, therefore having little or no market value. On the other
hand, it may be an antique, the value of which could not be determined by
using any formula.
Please view our Legal Notice section. We are
not accountants and we make no claim that the information on this page is
up to date or accurate. Regarding tax issues it is important that
you contact a professional accountant or service that can provide you with
the correct and current rules.