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A clothing manufacturing corporation donates last year's inventory to the Red Cross for use in its disaster relief efforts
A clothing manufacturing corporation donates last year's inventory to the Red Cross for use in its disaster relief efforts. The clothes have a fair market value of $200,000 and a basis to the corporation of $75,000. What is its charitable contribution deduction? Select one:
a. $137,500
b. $200,000
c. $100,000
d. $150,000
Expert Solution
SOLUTION
ANSWER TO THE PROBLEM IS OPTION D - $ 150,000
When corporate tax payers donates inventory they are allowed a deduction of one half of unlealized appreciation.
Here
unlealized appreciation= Fair market value - cost of goods sold .
Thus deduction allowed shall be sum of one- half of unrealized appreciation plus taxpayes cost , but it cannot exceed twice the cost contribution.
HERE
unlealized appreciation= Fair market value - cost of goods sold .
= $ 200000-75000 = $ 125000
DEDUCTION = $ 125000*1.5 +$75000 = $ 262500
BUT IT COULD NOT EXCEED TWICE THE COST OF CONTRIBUTION =$ 75000*2= $ 150000
THUS DEDUCTION OF $ 150,000 shall be allowed to corporation
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