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January 2010

Vo l . 2 • N o . 1 L
Advisor
U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s

L
6851 Oak Hall Lane Suite 300 Columbia, MD 21045 410-423-4800 Fax 410-381-5538 www.uhyllp-us.com

So why do we get backup Understanding


withholding notices from charitable donations
of inventory and
the IRS? other property
By Denise Adams
By Kerry Duvall

L ate fall is gen-


erally the time
of year that the IRS
TIN on the 1099, you are not
required to take any action.
T hinking of con-
tributing inven-
2. A single member LLC who uses an tory to a charitable
sends out annual
Employer Identification Number organization? Is
backup withhold-
for filing payroll returns but files
ing notices referred your company a
income tax returns under his/her
to as a Notice CP- “C” corporation? If
social security number.
2100 or CP-2100A. so, the related tax
Denise Adams
The letter starts 3. A sole proprietor who is engaging deduction for your
Kerry Duvall
out, “This notice is to inform you in business using a trade name. company could be
of possible errors in the Forms When preparing the 1099, the sole greater than you think! Typically,
1099 you filed for the year shown proprietor’s name should appear when a company contributes invento-
above.” These notices are generated on the first line followed by the ry to a charitable organization, the tax
because the IRS cannot match up “doing business as,” or DBA, deduction is limited to the company’s
the TIN/name combination on name. This error is corrected by basis in the property (generally, the
the 1099s filed. The letter goes on issuing a new 1099 as originally amount you paid for it). However,
to inform the recipient about submitted, entering the dollar when the donor is a “C” corporation
steps required and the need to amount as zero and marking the and the contributed property is inven-
backup withholding at the rate of corrected box on the 1099. Then tory, there is an increased deduction
28 percent. issue a second 1099 with the sole that you are allowed if you meet spe-
proprietor’s name on the first line cific requirements.
There are a number of reasons why followed by the DBA name.
the IRS cannot match up the TIN Include the dollar amount in the continued on page 2
number with the payee name. Some appropriate boxes.
of the most common reasons are —
4. A misplaced dash. (Example SSN PREFER TO GET YOUR
1. 1099s are machine read by the number filed as XX-xxxxxxx NEWS DIGITALLY?
IRS. Often times the numbers are instead of xxx-xx-xxxx). Correct
misread. For instance, an 8 might Sign up to receive our newsletter
as described above in #3.
be read as a 3, or a 2 as a 7. Check through email. Just email Kathy
to make sure the TIN on the In the case of #1 and #2 above, if at koconnell@uhy-us.com, and
notice agrees to the 1099 remitted. the name and TIN number agree to she’ll take care of the rest.
If the TIN on the notice is not the continued on page 2

UHY LLP brings specialists in business solutions, accounting and tax.


January 2010
Vol. 2 • No. 1

Understanding charitable representing that its use and dis- To illustrate this point, let’s assume
donations of inventory position of the property will be in Corporation X purchased inventory
and other property accordance with #1 and #2 above. for $1,000 and, as of the date of the
contribution, the fair market value of
continued from page 1 4. If the property is subject to the the inventory was $5,000. If the prop-
Federal Food, Drug, and Cosmetic erty were sold in the corporation’s
Requirements Act, such property must fully satis- normal course of business, the corpo-
fy the requirements of The Act for ration would pay income tax on a
In order to qualify for the increased
180 days prior to the contribution gain of $4,000. However, assume that
deduction, the donation must be
date. (Also, any donation of food instead of selling the property, the
made to a 501(c)(3) public charity
inventory must meet the definition corporation donated it to Charity Y.
organization and must meet four
of apparently wholesome food.) Based on these facts, the corporation
requirements:
would be entitled to a deduction of
1. The use of the property is related Calculation of deduction $2,000 (the lower of either $3,000,
to the organization’s exempt pur- Instead of deducting the corpora- basis plus half of the ordinary
pose and must be used for the tion’s basis in the inventory, the cor- income, or $2,000, twice the basis).
care of the ill, needy or infants. poration may deduct the lower of It’s important to note here that the
2. The property is not transferred to 1) the basis in the property plus half deduction is still limited to 10 per-
of the ordinary income that would cent of corporate taxable income.
the organization in exchange for
have been recognized if the proper-
money, other property or services.
ty were sold at fair market value on If you have any questions regarding
3. The taxpayer receives from the the contribution date, or 2) twice the this deduction, please contact Kerry
organization a written statement basis of the property. at (410) 720-5220.

So why do we get backup If the payee fails to complete and


withholding notices from return the second W9, you should ALERT!
the IRS? begin backup withholding immedi-
If your organization receives
continued from page 1 ately following the date indicated
government notices related to
on the B-notice. Backup withhold- changes in payroll filing require-
the 1099 remitted, the filer is ings are deducted from all future ments or changes in unemploy-
required to send a B-notice to the payments at the rate of 28 percent. ment rates, please forward these
payee along with a new W9. Both For example, a subcontractor is due to your payroll service as soon as
forms can be found on the IRS $1,000. The payer would withhold possible. This is especially
website at www.irs.gov. If the $280 and forward payment to the important since many states
information on the new W9 differs payee for $720. When completing have imposed a “surcharge” on
from the information on the 1099 the current year’s 1099, the full unemployment beginning in the
filed, the original 1099 should be $1,000 would be reported as income first quarter of 2010. You are
corrected as described in #3. If, responsible for notifying your
on the appropriate box and the $280
however, the information on the payroll service of any changes.
in backup withholding would be
new W9 matches the 1099, the filer Payroll services are not responsi-
reported in Box 4 of the 1099.
is not required to take further ble for any penalties and interest
action but should keep both W9s All backup withholdings are report- imposed on you for failure to
on file to show the payee certified ed to the IRS annually using Form report changes to them in a
the TIN/name combination. 945. timely manner.

The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal,
state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken
or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals.
UHY Advisors, Inc., provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc.,
and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc., and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent
CPA firm that performs attest services. UHY Advisors, Inc., and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.