My spouse and I live in California and we're older than 65 and are in the 33% ordinary income tax bracket. Recently, I purchased 40 laptops at $50 each as part of a side business. Putting my own efforts and expertise into refurbishing, I have sold five in the last two months in documented sales on eBay for an average price of $180. If I decide to donate the remaining laptops to a 501(c)(3) charitable organization, can I deduct the fair market value on Schedule A?

ANSWER

The BIDaWIZ Team's Answer:

Do you normally claim the standard deduction or do you itemize deductions? The only reason you would ever itemize is if your total itemized deductions exceeds the $14,800 standard deduction for married filing couples 65 and older. This concept is critical in determining whether exploring this charitable deduction even makes sense. Based on the fact pattern that you provided, the property in question is considered ordinary income property (not capital property) as it could be sold in a business. Meaning, you would have recognized ordinary income or a short-term capital gain had you sold it at fair market value on the date it was contributed. Per IRS standards, the amount you can deduct is the fair market value less the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Thus, this rule limits the deduction to your basis in the property or in your case $50 per laptop. This is referenced in IRS Publication 526 and Internal Revenue Code Section 170(e)(1)(A). As such, the deduction you can claim for each item is based on the basis of the property, not the fair market value. In other words, if you could sell it for $250 or $500 each, it still doesn't matter. The maximum deduction would be the amount you paid for it or $50 each. In addition, based on the 40 unit amount, that would translate to $2,000 in potential charitable deductions. If the $2,000 combined with other deductions exceeds the $14,800, then you should certainly claim it. Having said that, the financial benefit will be minimal assuming your in the 33% tax bracket or $660 ($2,000 x 33%). If this was considered capital property, then you would be able to use the fair market value and that could be more impactful.