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Can Consignment shop donate and claim?

Most consignment shops gain property rights to their products after an expiration period. After this expiration period, they usually take the clothing they now own and donate to charity. Can these items still be claimed on taxes, even if the shop didn't buy these items (they have $0 purchase value since they were all "given" to the shop)?
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5 Replies
AnnetteB
Intuit Alumni

Can Consignment shop donate and claim?

Even though the consignment shop did not purchase the items, they may donate them and claim a deduction if they are the owner of the items at the time they are donated. 

The donation amount would be based on the fair market value of the items at the time of the donation, not on the price paid to purchase the items.  This is true no matter who is donating items to charity.  If you as an individual received a gift that you decided to donate to charity, you would not have purchased the item.  You would value your donation based on the fair market value of the item. 


mel3121
Returning Member

Can Consignment shop donate and claim?

Does the consignment shop get a charitable donation deduction.  What are the journal entries for the donation and putting the goods into inventory when they become the stores if goods do not sell and are donated.

DianeW777
Expert Alumni

Can Consignment shop donate and claim?

No, if the consignment shop is operated as a sole proprietor or a partnership. This would go on the personal side of the tax return under charitable donations.

 

Yes, if the consignment shop is operated as a C or S Corporation.

 

There is no cost to purchase the consignment items, therefore the books journal entry would be a credit (increase) to capital and debit (increase) to inventory.

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Can Consignment shop donate and claim?


@mel3121 wrote:

Does the consignment shop get a charitable donation deduction.  What are the journal entries for the donation and putting the goods into inventory when they become the stores if goods do not sell and are donated.


The above answer from 2019 is incorrect.

 

With respect to personal property, you can only claim a deduction for the fair market value, or your cost basis, whichever is lower.  Found property is considered taxable income.  If you find property, and correctly report the fair market value as miscellaneous income, that is your basis, and you can claim the same value as a donation deduction.  However, if you don't report the value of the found property as income, your basis is zero and you can't take a tax deduction for donating it.

 

With respect to business inventory, you can also only deduct the lower of your fair market value or your cost basis.  See publication 526, page 10.

https://www.irs.gov/pub/irs-pdf/p526.pdf

 

For inventory included in this year's opening inventory, you can take a deduction for the donation at either the cost basis or the FMV.  For inventory that was not in this year's opening inventory, you don't take any deduction for donating it.  You include the cost of goods in your inventory normally.  Your tax "deduction" comes from the fact that you didn't get any money for selling the items, therefore you have less taxable income to report.

 

To give an example, if you buy $1000 worth of inventory and sell it for $3000, you have $2000 of taxable income.  If you donate part of your inventory and sell the rest for $2500, then you have $1500 of taxable income.  You can't take another deduction because you can't subtract an item from your income if it was never there in the first place. 

 

If you don't include the value of expired consignments as taxable income, you have no basis in the property and can never take a deduction for donating it. 

Can Consignment shop donate and claim?


@DianeW777 wrote:

No, if the consignment shop is operated as a sole proprietor or a partnership. This would go on the personal side of the tax return under charitable donations.

 

Yes, if the consignment shop is operated as a C or S Corporation.

 

There is no cost to purchase the consignment items, therefore the books journal entry would be a credit (increase) to capital and debit (increase) to inventory.


When items become the property of the consignment shop for free (at the end of the consignment period), is that taxable income to the shop at the property's FMV?  Seems like that should be so if "found" property is taxable income. 

https://turbotax.intuit.com/tax-tips/general/what-to-know-about-taxes-on-found-property/L9BfdKz7N

 

If the property is included in taxable income, then it has a basis and can be donated, however, the rule about inventory in publication 526 would still seem to apply.  The tax "deduction" is that fact that you recorded cost of inventory but no sales proceeds.  If the consignment shop does not include the FMV of consigned property as income, the taxpayer has no basis in the property and gets no donation value.  I don't see any circumstance where consigned property generates a tax deduction except when the property was declared as taxable income in a previous year and included in the opening inventory with a cost basis, per page 10 of publication 526. https://www.irs.gov/pub/irs-pdf/p526.pdf

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