Jeremy/Bonnie Hellman on sat 14 aug 04
Hi Phil and anyone else still awake with this discussion-
Those rich movie stars and other celebrities do NOT get to deduct megabucks
for their personal items donated to charity, even if the charity sells them
for megabucks. This is a big misconception. However, they do get tons of
public credit and thanks, unlike many artists who donate pots they would
otherwise sell to help pay their bills.
If your business sells an item, it's revenue, whether cash, federal reserve
notes, credit card charges, debit card charges or check. If your business
barters an item, you have income. This is not the least bit ambiguous to the
Internal Revenue Service. (If you're audited, you will be asked if you
bartered any items, and if you included the value of the items on your tax
return.)
What you have proposed, assuming that you actually record the sale on your
business records, does NOT improve your financial situation in any way. No
matter whether you barter, sell, donate or break the piece, if you have
ending inventory in your cost of goods sold, you have deducted the cost of
the materials in that pot or ceramic piece. If you do not have inventory in
your business, you are deducting the cost of the materials at the time you
buy them.
If you donate the pot you have bought from your friend or bartered, valued
at exactly the same dollars as your pot that THEY bought or bartered from
you, where on your tax return are you planning to deduct this charitable
donation?
There are 2 choices.
One is to include it on your business return, likely a Schedule C,
presumably as advertising. If you do that your financial position is
essentially unchanged. You increased your income by a given dollar amount.
You decreased your net income by presumably the exact same dollar amount. No
change. Then there is the admittedly small audit risk that my advertising
expense could be disallowed on audit if I didn't get enough exposure for my
business donation to qualify as advertising.
The second choice is to include that charitable donation as a charitable
donation, which means it appears on your itemized deductions, Schedule A.
You increase your income by a given dollar amount. However, you have also
increased your self-employment income by the same amount, so the "income"
(whether barter or cash) now "costs" you Self-Employment Tax on Schedule SE.
I have assumed that your Schedule C or Partnership business generates
taxable income, not a tax loss.
You may actually not get a full deduction, or any deduction on your Schedule
A. Your standard deduction may be higher than your itemized deductions, so
you end up NOT itemizing, and not using Schedule A. Or, if the income on the
tax return is high enough, you will be subject to phase out of your itemized
deductions, and not get the full benefit of that charitable contribution.
However, even if you do get to deduct the full value on your Schedule A,
itemized deductions, you may be paying around 12% (effective rate) of
self-employment taxes. Where I live, in Monroeville, PA, we also get to pay
a gross receipts tax of .4% (less than half a percent) regardless of net
income. So if I have traded with you our $100 pots, I am going to pay $12
more in self-employment tax and $.40 in gross receipts (mercantile) tax.
I repeat that there is no financial advantage to doing what you proposed,
even assuming that all aspects of the transaction are properly recorded on
your books and tax return.
If the charity realizes a million dollars from your friend's $100 pot (that
you donated), you cannot deduct a million dollars.
The value of your own time is not a financial donation to any charity
whether you serve on the board of directors or stuff envelopes or show up
and create a ceramic masterpiece which the charity then sells for megabucks.
This is not to say you shouldn't do it. Indeed I would encourage everyone to
support any organization whose mission they agree with. Support them with
money, with ideas, with your time, with your creations of all sorts. Just
don't take a charitable donation for any dollar amount unless you are out of
pocket for that dollar amount.
Steve Slatin has said, and I agree, that you can only deduct the lower of
cost or market for items you donate to charity, and the IRS is definitely
cracking down on this, particularly with cars and trucks. The usual
exception is appreciated capital items you have held for at least 6 months,
including stocks and bonds, and possibly works of art where you can get an
independent appraisal of their value. The other exception I can think of
would be an item you inherit, where the value has been stepped up on the
estate tax return.
When you buy or barter for your fellow artist's pot, if you receive a pot
significantly greater in value than the one you sell your friend, you would
likely be expected to include as income on your return, the higher value.
The IRS assumes that you would only barter things of approximately the same
value, so you'd have a hard time suggesting that you got a pot of greater
value than the one you gave.
Then there is also the question of what you have purchased from your
friend-- is it inventory, or a product you'll sell? If so, it is NOT
capital, no matter how long you own it. The value the charity assigns to
your pot, even the princely sum they receive when they sell it, is not your
deduction on your tax return. You get to deduct only the amount you paid,
and maybe less. As Steve Slatin said, you get to deduct the lower of cost or
market. (So if your friend's pot is worth a lot less money than yours, you'd
include the value of your pot on the income line of your tax return, and
deduct the fair market value of your friend's pot (which is lower than the
value of your pot) on your tax return. You lose!
And yes, on your books, you record the retail price of the pot you've
sold/bartered to your friend, or your usual selling price. You record the
fair market value which is determined by looking at similar sales of your
work and/or their work.
Is it an investment? If so, it sounds like a personal purchase, not a
business purchase. When you donate this pot, after 6 months, you'd have to
prove that its value was the amount you claimed on your return, assuming you
can deduct it. You'll want to have on hand something to document your value,
if it is greater than the pot you bartered and included as income on your
tax return. Yes, this is possible, but not probable IMHO.
However, let's say that you DID buy a fabulously valuable pot for pennies at
a Thrift Store or garage sale. You then put this into your personal art
collection and hold it long enough for it to become a capital asset. Then
you donate it to a qualifying charity. If the pot is truly valuable, you've
donated something valuable, rather than selling it and keeping the money.
This isn't a business transaction, it's a personal transaction. And yes, if
your intent is to give the charity a lot of money, I believe you'd be best
off tax wise, in donating the capital asset, rather than selling it (and
paying capital gains tax) and donating the cash, because you could claim a
charitable donation for the appreciated value. Certainly this is true with
stocks, and I believe it used to be true for works of art, although I
haven't looked at it in a long time, and it may not be true.
Phil, your proposed barter and donation as you outlined it, at its very
best, does not help you on your tax return. It may actually cost you money.
If you pay me a set sum of money to prepare a tax return and YOU donate this
service to a bona fide charity, I will include the money you pay me on my
business tax return. You may be able to take a donation for this same sum on
your tax return. I would thank you for donating my services (for which I've
been paid). If I decide to donate the value of my preparing a tax return to
that same charity, I would NOT include anything in income, you would not get
a charitable donation and I would not get a charitable donation, because the
value of my time is not a charitable deduction. When I donate my time to an
organization that provides free tax preparation services to low income
seniors, I feel good that I'm doing something to benefit society, but the
only write-off is my mileage and parking fees.
Phil, in your original posting, I was quite uncomfortable that you might be
suggesting people would not record income for their barter. Apparently you
were only suggesting that actual cash/check did not need to change hands. I
agree that cash does not need to change hands, but I'd repeat that barter is
retail income for businesses. There is no consensus needed and there are no
ambiguities in the US tax code on this subject. That's what you are supposed
to do.
That's how it works. Usually with taxes when it looks too good to be true,
or you are getting a greater benefit than it costs you, it IS usually too
good to be true.
As usual, I recommend that you consult your own tax advisor for your own
particular situation, and don't rely on your own interpretation of the way
you wish the tax code were written.
Bonnie
Bonnie Hellman, CPA in PA & CO
----- Original Message -----
From:
To:
Sent: Saturday, August 14, 2004 1:56 PM
Subject: Re: How do one handle donations. - Now, respecting Bonnie's
mention...
> Hi Bonnie,
>
>
> Below...amid...!
>
> ----- Original Message -----
> From: "Jeremy/Bonnie Hellman"
>
> > Hi Phil and other clayarters,
> >
> > We've been through this before.... if you sell your work
> at whatever price,
> > this is income to you.
>
>
> Yes, or, no, or it depends, but generally, that is the
> consensus...too, there are ambiguities sometimes...
>
> Income may also be one's receiving goods or services in
> exchange for one's "Pots" or one's Work, or one's goods or
> services, yes?
>
>
> >If you buy someone else's pot, perhaps it is a
> > business expense (advertising for your business when your
> name appears in
> > the program or purchased as a pot you need to study to
> improve your own
> > work?), but maybe not.
>
>
> Yes, maybe, or maybe not, and or, if you buy or trade
> something for some one else's
> something, and, donate that something a charity, it may or
> may not be a
> deductible expense for your having bought and donated
> it...but when it is, it is...
>
> One can also donate someone else's services for which one
> has paid, yes?
> And have a charitable deduction for it...
>
>
> > If it is a business deduction, and you deduct it on
> > your US tax return, then the net on your business tax
> return is zero, and
> > you're no better off and possibly no worse off (unless you
> live in an area
> > with a gross receipts tax, in which case you end up out of
> pocket as you
> > remit that gross receipts tax to your local taxing
> authority. If you deduct
> > the purchase of the other pot, you have already written
> off the cost and
> > cannot claim it a second time, when you donate it.
>
> It may or may not be a 'business' deduction...or would
> depend on whether one is in business or not, or the kind of
> business it is, for the kind of
> deduction it is, but, broadly, we are talking about
> deductions to charity, whether from a business as such, or
> not...and maybe we are talking also about business
> deductions as relate to the cost of doing business or
> advertising or promotion and so on...
>
> Too, it depends on what one paid for the "Pot"...one could
> buy a very valuable Pot in an occasion of an unexpected
> bargain at a garage sale or thrift store, and, getting it
> appraised, find it to have an
> authenticated high value which may be verified. One could
> then
> donate this Pot to a charity, and what you paid for it is
> then kind of moot. The value of the donation would be the
> appraised value, and that value would not be a
> capital gains, or other liability, would it?
>
> Too, some of this may depend for it's utility, on one's tax
> bracket, would it not?...and or if one finds
> advantage in lowering the net profits, enough
> to get into the next
> lower bracket, or if that is worthwhile...
>
> ...it is a game of puzzles, no?
>
> ...seems so to me...
>
>
> > If you don't deduct the pot you "buy" as a business
> expense and plan to
> > deduct it as a charitable contribution, that appears not
> on your business
> > tax return, but as an itemized deduction on Schedule A (if
> you have enough
> > deductions to exceed the standard deduction), possibly
> subject to certain
> > limits, if family income is high enough. Even if you can
> deduct the full
> > cost on your Schedule A, you have included additional
> income, probably
> > subject to some self-employment tax.
>
> Probably...yes...
>
>
>
> > The final word is that this is NOT a way around your not
> being able to take
> > a deduction for the retail price of donations of ceramic
> pieces you make. It
> > just can't be done legally.
>
> I never said anything about 'retail' in any way whatsoever.
>
> Too...
>
> It would be and is, entirely 'legal' to buy someone else's
> Pot, and to
> donate it to a charity, and to receive from that charity a
> receipt as indicates the value they assign to it, or to use
> some method as would be accepted as to what the value of the
> pot or other item is, and, to
> deduct that value as a charitable contribution, or as one is
> entitled to do, anyway.
>
> If two Artists buy each others' work and do this, it is
> entirely legal.
>
> Now, how much of what kind of advantage they may find, and
> in what way, is a
> different question.
>
>
>
> When rich patrons donate Art to charities, when rich rock
> stars donate a guitar or a tee-shirt or whatever, it is not
> usually
> Art or items they as individuals have made, is it?
>
> No...
>
> They get full 'fair' market value for their donation too, do
> they not?
>
> A tee shirt may be 'worth' five thousand dollars, and they
> will get that much of a 'deduction' do they not?
>
> Yes, they do...
>
>
> > You never get to deduct the value of your time. You only
> get to deduct the
> > cost of materials that went into the piece you donated,
> and presumably you
> > have already deducted those.
>
>
> You get to deduct the value which is accepted or assigned to
> the thing in question according to the reasoning or logic or
> appraisal or agreements as concern the value which the
> thing is demonstrated to have.
>
> If a wealthy patron donates a Picasso to a charity, he or
> she does not tend to merely 'deduct' the value of the
> materials it is made of, but the value assigned to it by
> some other criteria, such as appraisals or the sale price in
> the actual charity auction or something as gets negotiated
> between his or her representatives and the IRS.
>
> Or...
>
> Yes, but you may deduct the value of someone else's "time"
> when you have paid them for it, for something as is a
> deduction, an expense, or for something as is to be placed
> in an
> depreciation schedule...or something one is to donate to a
> charity...
>
> Hence, my initial quip...
>
> Let it be someone else's "time" and you may deduct it 'as'
> you
> are entitled to do according to how you are entitled to do
> so..
>
> The rest of which subsequent to or ancillary to that, is
> itself a worthy topic, but not yet THE
> topic necessarily, or, we best get this in the operatively
> useful order lest we become, or remain, confused...
>
>
> > So, Phil, you may want to stop advising people to do this,
> since it is not
> > legal and never has been.
>
> Bonnie, I did not "advise" anyone to do anything!
>
> I was, and am, thinking 'out loud' TO enjoy doing so, and to
> enjoy a
> discussion.
>
> And, I will argue with you till the Cows come home that it
> is certainly and entirely "legal" to buy someone's Work, and
> to donate to to a
> Charity, and to take the deduction to which one is entitled
> to
> for having done so. Or to buy someone's Work as a business
> expense, and when appropriate, to enjoy the deduction or
> depreciation allowance for that Work, to which one is
> entitled.
>
>
> And that it is entirely legal for two parties to buy one
> another's Work, and to donate said Work to some charity and
> to take the deduction to which they are entitled for having
> done so.
>
> Or, to buy one another's Work where to do so is a business
> expense, and, where appropriate, to depreciate it on a
> schedule or deduct it as may be according to the code
> particulars as regard it...
>
>
> What is the confusion here????
>
> I think you did not understand what I was saying...!
>
>
>
> > Bonnie
> > Bonnie Hellman, CPA in PA & CO
>
>
> Best wishes!
>
> Hugs and play...
>
>
> Phil
> el ve
>
>
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