Some of you guys are real keen on this income tax stuff so here it goes...

Last month I built and donated a fly rod to a non-profit conservation club so they could put it up for silent @#$%&. I just got a fill-in tax form from the organization that I'm supposed to complete and return to them. My retail value for the rod--based on what I would charge for the same rod if this was a custom order--was $673 and change. The form asks me for my "cost or adjusted basis". Do I enter my total actual cost for components here? If so, how do I account for my labor? Exactly how much of this fly rod can I write off?





Josh Markvan
www.markvanheirloom.com

You can claim a donation or write off up to the amount allowed. How much is that? Remember, your cost is more than your components - these rods don't just jump together. Your labor is part of your cost as well. You'd have to ask your IRS agent (always the wise thing to do) but I would think what they want is what would be considered a wholesale or first point of sale price. For you, this could probably be done via the "constructive sales price" which would be 60% of your retail ($673) price.

Now let me toss this in on you - you'll have to pay excise tax on it if you receive or claim any compensation for it. If you plan to deduct it as a donation and write that amount off as non-taxable, you are receiving a form of value for it and the excise tax is due.


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How is the "constructive sales price" determined and how did you come up with 60%?

I'll certainly talk to a tax person but I knew you would have something valuable to offer. Thanks so much. It's a big help.



Josh Markvan
www.markvanheirloom.com

The IRS came up with the 60% thing. Tom, is the excise tax article on the library page? If it is you can get the ruling number for the 60% rule there.

"Thus, the Internal Revenue Service has made an allowance in the amount of the selling price which the custom builder and his customer is liable for. This is intended to more closely approximate what the price and the tax would be if sold at the wholesale or jobber level. Such a price adjustment is known as a "Constructive Sale Price" and can be found under IRS ruling 26 CFR 48.4216(9)-2:Constructive Sales Price, basic rules. There is also a revision under: Rul. 81-226. Among custom builders, this is often referred to as the "60% rule."

The article is on the library page. As usual, it never hurts to talk to an IRS person, hopefully one that is knowledgeable on the excise tax. I'll try to get Jack Brown's number for you. For the next little while, he is still the resident head of the Sportfishing Excise Tax division.


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I see. So if I donated this fly rod which retails for $673 by my determination, I can write off 60% or $403.80. And this is the amount that I calculate the excise tax on, right? Again this is a great help. I really appreciate it. And thanks Tom for looking for Jack Brown's #, but I have a local excise tax guy that I can call anytime.

Josh Markvan
www.markvanheirloom.com

Yeah my local excise guy has been willing in the past to look into sportfishing stuff for me...
So the "adjusted basis" is 60% of my retail total and the amount that I can write off on an outright donation.
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Now what if SELL a fly rod to a 503(c) at 60% of my retail cost? Can I then write off the 40% discount that I "donated" to them??

Josh Markvan
www.markvanheirloom.com

Yes, when sold to the end user, the excise tax is figured at 10% of 60% of the selling price. When sold to a reseller (dealer, shop, etc.) the tax is a flat 10% of the full selling price. Do keep in mind that a recent revision has capped the tax at $10. So on rods selling for more than about $160, the tax is just $10. Think of it like this, the tax is 10% or $10, whichever is less.

I'd rather see you talk to an IRS agent than rely on me for income tax information. I know a great deal about the excise tax but not nearly so much about general income tax questions. If you have a set retail price and you donate a portion of that price to a club or benefit, you may well be able to at least write off the amount you donated. But better check with the IRS on those type questions.

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Edited 1 time(s). Last edit at 04/25/2006 03:45PM by Tom Kirkman.

Absolutely. Yeah I see how the excise tax works but I'm more concerned with what's allowable for deduction. For fly rods, for me, the FET always gets capped. This gave me a great place to start. As always, thanks a million...

Josh Markvan
www.markvanheirloom.com