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How Non-Cash Charitable Donations Can Lower Your Tax Liability

Around this time of year, your thoughts may already turn to the holidays and your charitable giving plans, both personally and for your business. Charitable donations are often used to reduce income and lower your tax liability as well as provide much needed support for our local non-profits.

Tax-related complications generally do not present themselves when cash gifts are made to a charity other than possible questions of proof.

However, difficulties can and do arise when you make a gift of property – common items that may be donated to charity as a tax deduction include inventory, equipment, furniture, vehicles, clothing/uniforms, stocks or even artwork.

Many companies find they have items to donate when they go through an expansion, move, change in product lines, equipment upgrade or buy fleet vehicles. These transition periods may provide opportunities to donate items to local charities.

You may consider adding property donations this year as an alternative to cash, so long as you understand the Internal Revenue Service’s (IRS) definitions and guidelines on these donations.

When you have property items for donation, consider the following before giving property contribution deduction(s) of $500 or more:

  • How the property was acquired
  • The acquisition and donation dates of the property
  • The cost or other basis of the property
  • If the property is ordinary or capital gain property
  • Fair market value of the property
  • Detailed description of the items donated
  • Written and signed receipt from the charity
  • Form 8283 must be prepared and attached to return
  • Special percentage limitations
  • Taxable income limitations for C corporations.

If the property contribution deduction(s) is $5,000 or more, the following items must also be considered in addition to the items listed above:

  • A qualified appraisal made no more than 60 days before the appraised property's contribution
  • An appraisal summary may be required as an attachment to the return depending on the amount of the deduction
  • Property exceptions where an appraisal is not required

The IRS closely scrutinizes non-cash charitable contribution deductions. There needs to be proper documentation to substantiate the donation or else the donation cannot be taken as a deduction. If the IRS audits your tax return and finds that documentation is lacking, they could disallow the property deduction and assess penalties and interest.

As you can see, contributions of property to charities are a bit more complicated than run of the mill cash contributions. If you have any questions about a contemplated contribution of property, please do not hesitate to contact your CPA in order to maximize the tax benefits of your generosity.

It may still feel like summer outside, but the holiday season is just around the corner. A CPA can help suggest ways to reduce your 2017 tax liability through charitable giving, both cash and non-cash donations. Finding tax savings as well as giving to the community we all care about is a win-win for everyone.

David Porter, CPA can be reached at dporter@pbtk.com. When he isn’t working busy tax seasons, he can be found backcountry fishing or watching his sons play baseball or race dirt bikes.

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Supplement Your Financial Statements With Timely Flash Reports

Most companies prepare financial statements on a monthly or quarterly basis. Unfortunately, it usually takes between two and six weeks for management to finalize reports that comply with U.S. Generally Accepted Accounting Principles (GAAP). The process takes even longer if an outside accountant reviews or audits your financial statements. Decision-making based solely on this stale information is reactive, not proactive. To help bridge the timing gap between daily operations and receipt of monthly or quarterly financial statements, consider using “flash reports.”

Reap the Benefits

Flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections and payroll. Some metrics might be tracked daily — including sales, shipments and deposits. This is especially critical during seasonal peaks or among distressed borrowers.

Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex to maintain. Comparative flash reports identify patterns from week to week — or deviations from the budget that may need corrective action.

Beware of Limitations

Flash reports can help management proactively identify and respond to problems and weaknesses. But they have limitations that management should recognize to avoid misuse.

Most important, flash reports provide a rough measure of performance and are seldom 100% accurate. It’s also common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.

Companies generally use flash reports only internally. They’re rarely shared with creditors and franchisors, unless required in bankruptcy or by the franchise agreement. A lender also may ask for flash reports if a borrower fails to meet liquidity, profitability and leverage covenants.

If shared flash reports deviate from what’s subsequently reported on GAAP financial statements, stakeholders may wonder if management exaggerated results on the flash report or is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with GAAP. Please contact auditor Bill Nelson, CPA with any questions.

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