A retailer has given our charity supposedly new items and reported their value to the IRS as $216,000. In reality, these were returned items and sometimes damaged. We are currently trying to sell this stuff and find we can't even get half of what the donor reported to the IRS. We sold some online and got about 20 percent of the retail value, before we paid huge commissions. We expected to make money to use for our mission. It looks like we are going to end up owing the IRS taxes on the difference between what we were told they are worth and what we have been able to sell them for. Please help.
It sounds like the stuff you received was totally unrelated to your mission. Ordinarily, you could sell it or dump it and not worry about tax because the income is taxable only if you are running a business of selling stuff that is unrelated to your mission and is “regularly carried on.” If you have been continuously trying to sell it for a while, you may have crossed the point at which it would be considered a regularly carried on business and you could be subject to unrelated business income tax (“UBIT”). (See Ready Reference Page: “Nonprofits Often Worry About UBIT”).
In that case, you would have to file a business tax return if you received more than $1000 of revenue from the business during the year and would have to pay a tax on any net income of more than $1000. You measure profit by the difference between your cost basis in the goods and the amount you received from selling them. Because the goods were given to you, your cost basis is the cost basis of the donor. Unfortunately, you have no idea what that is.
You do know that if the donor claimed a deduction based on fair market value, that was not the cost basis. What you may have been told they are worth has nothing to do with the donor’s cost basis. The donor might be able to tell you the cost basis, but you may not want to ask. Normally, when goods are returned to a seller, they are returned to inventory at their original cost. You might make an estimate of the donor’s cost by looking up what the normal margin would be for a retailer purchasing these types of goods for resale.
If you are getting only about 20% of the retail value of the goods before you pay your own commissions, it does not sound like you could have much, if any, profit. If the retailer somehow wrote off the cost so that it had no cost basis left when it gave you the stuff, you may have a little profit from your sales, but only if you sell enough of the goods to exceed the cost basis for all. It may make sense to dump whatever you have left.
Find an attorney who understands UBIT to help you figure out what you should do based on your actual situation. I am only speculating, but it sounds like you won’t end up with the gift being a total loss.
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