Question

Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $10,000 in cash. Second, it could give stock it initially purchased two years ago for $8,000 but is now worth $12,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes?

A. Cash > Stock > Inventory.
B. Stock > Cash > Inventory.
C. Inventory > Stock > Cash.
D. Inventory > Cash > Stock.

Answer 1

In the scenario given, the most tax-efficient contribution Canny Foods Co. can make is the stock, then cash, and finally inventory, which is represented by the option 'B. Stock > Cash > Inventory.'

Step-by-step explanation:

When evaluating the relationship among possible charitable contributions in terms of the amount deductible for tax purposes, we consider the type of property being donated and its associated tax rules. Cash donations are usually straightforward, allowing for a deduction of the amount given.

For stocks, the donation is typically the fair market value of the stock at the time of donation, and it does not require the donor to pay capital gains tax, which in this case would be on the increase in stock value from $8,000 to $12,000. Inventory contributions can often be deducted at the fair market value, but they might involve additional considerations related to the cost of goods sold.

Therefore, in Canny Foods Co.'s scenario, the correct relation among possible charitable contributions in terms of amount deductible for tax purposes is: B. Stock > Cash > Inventory.