Amidst the national need for medical supplies, many clients are considering producing supplies (on their own or with business partners) and donating them to hospitals or others serving the sick or to other agencies providing essential services. This briefing, while not exhaustive, highlights certain U.S. tax considerations that clients should weigh as they determine the most advantageous means to donate medical supplies.
Should I form a tax-exempt entity to facilitate in-kind contributions?
A nonprofit tax-exempt entity can be a useful vehicle for clients that would benefit from an entity that can carry on charitable programs for years to come. However, assets contributed to a tax-exempt entity cannot easily be recovered if plans change but instead must be irrevocably devoted to tax-exempt purposes. Additionally, unless the entity can garner sufficient public support to establish that it is a “public charity” rather than a “private foundation,” the entity will be subject to restrictions on dealings with substantial contributors. For example, a private foundation formed to produce and distribute personal protective equipment (PPE) could not purchase supplies or finished PPE from a company that provides substantial support to the foundation.
Clients should also consider whether a potential tax-exempt entity is expected to generate income (rather than losses). If a business is not expected to generate income, obtaining tax-exempt status for the business is of limited value. Furthermore, certain enhanced tax benefits, described below, may be available to clients without the formation of a tax-exempt entity. In many situations, conducting the relevant business in a taxable entity (including, possibly, a joint venture with another enterprise) may be a better option.
Are there enhanced tax benefits available to those who make in-kind contributions of medical supplies?
Special rules apply to the donation of certain inventory that can be used to care for the ill, including certain supplies needed to care for COVID-19 patients or other patients of certain healthcare institutions. Taxpayers making these donations can deduct up to twice their basis in the inventory — double the deduction available for a standard donation of inventory — if they ensure that the donation is structured and documented in the correct way.
The documentation requirement is designed to ensure that the donated inventory is actually used to care for the sick. To satisfy the requirement, the recipient must provide the contributor with a description of the contributed property and the date of its receipt, and the recipient must represent that (i) the property will be used in the required manner and (ii) adequate records will be maintained and provided to the Internal Revenue Service upon request. Donations must be made to tax-exempt healthcare providers (e.g., a tax-exempt hospital or clinic) and not to taxable healthcare institutions (such as taxable hospitals or physician groups).
If the property to be contributed is subject to the Federal Food, Drug and Cosmetic Act, the contributed property must satisfy the requirements of the act governing the specific product (i.e., as if the property were to be sold instead of donated).
Does the Coronavirus Aid, Relief and Economic Security Act increase the availability of charitable deductions?
The limitations on charitable deductions made by corporations in 2020 have been eased for cash (but not medical supply) donations from 10 percent to 25 percent of the excess of the corporation’s taxable income over the amount of other allowed charitable contributions. Taxpayers who are unable to fully use their deduction for the year 2020 — for example, because they do not generate sufficient taxable income in this economic environment — can carry forward the deduction for up to five years.
