When you spend time in the auction business, you quickly discover that not every item you find can be sold at a profit. Fortunately, there are a few ways to recover some of your investment on items that you can't or don't wish to sell. One of the most valuable things to consider is donating your items for a tax deduction. There are a lot of taxes associated with running your own resale business, and finding ways to reduce the impact of those taxes can be extremely beneficial in the long-term.
The concept of getting a tax deduction for donations is fairly straightforward. You simply gather up the items you don't wish to sell and deliver them to a tax-deductible non-profit organization like Goodwill or Salvation Army. Some of these organizations will even come pick up items from your house if you make arrangements in advance, which can cut down on the time and hassles associated with getting rid of merchandise. Once the items are donated, you'll receive a blank receipt. It's up for you to determine how much the item was worth when it comes time to claim your taxes.
For small donations under $500 or so, the IRS will usually trust your calculations as long as nothing else seems suspicious on your return. For larger donations, you will need more paperwork to prove the value of your items. You'll need to document how you got the item and how you derived its value. For very pricy items, the IRS will require an appraisal of the item.
The trick, then, to getting the most out of your donations is understanding exactly how these items are valued and how to get the most for the donations you make while keeping good records to back up those valuations. There are a few tools you can use to complete this:
- Turbo Tax has a tool that allows you to track your donations year-round to make it easier to deduct them at the end of the year, especially if you're already doing your taxes on the site. Not only can you add the items, you can also get accurate valuations of their fair market value. http://turbotax.intuit.com/personal-taxes/itsdeductible/
- You can also check the items you donate against the Salvation Army's donation list: http://www.use.salvationarmy.org/use/www_usn20.nsf/vw-text-dynamic-arrays/33CE09196410A2148825770B0054FF7A?openDocument&charset=utf-8. This should give you a good base-line even if you're donating to a different charity.
- You can also learn more about the legalities of the donations by visiting the IRS's website here: http://www.irs.gov/pub/irs-pdf/p561.pdf
When valuing an item, it's also important to realize that the deduction is limited to the lower figure of either the basis (what you paid for the item) or its fair market value. This means that if you bought an item at auction for $100 and later found out that it's worth $1,500, you can only claim $100 in value for its donation.
One other thing to bear in mind: You can only claim donations of up to 50% of your adjusted gross income. The remainder can be carried over and applied to the next year's taxes. Your AGI is the amount of income you have left over after business expenses, half of your self-employment tax, IRA contributions, alimony payments, etc. This means that if your business runs with extremely tight profit margins – or if you nickel and dime your expenses – you may run into problems with high donations.
You also can't double-deduct: If you already deducted the price of buying a locker as a business expense, you cannot then deduct the value of the items in that locker as a charitable donation. Tax law can be tricky, and it's always a good idea to run this buy your accountant to prevent yourself from audits. By keeping careful records and being mindful of your options, you can maximize your deductions without getting in trouble with the IRS.