Contribution or Fee?

[ILLMAS]

Lets say you sell widgets, and you want to sell them to employees/guests of a non-profit organization at their annual benefit event. The organization cannot accept a fee "wink wink" but they would gladly accept a monetery contribution and allow you to come in the event and sell. You make a couple of sales and when you come in to see your tax preparer, you tell him/her, I had to make theses contributions in order to sell my widgets..... your checks are made to the non-profit organization and are memo as Contribution. Taking them as a contribution or a fee will have different effects on your tax return (1120S), contribution will be reported on K-1 and itemized on Sch A or writing it off as a fee on the 1120S, which one would be the correct based on the scenario?

This is probably the best explanation of a widget

http://youtu.be/YlVDGmjz7eM

[Lion EA]

Was it actually Marketing or Cost of Sales (not COGS)? Too bad he memoed as Contribution. But if his intent was to make a Contribution, then that's what it was.

[jainen]

>>they would gladly accept a monetery contribution and allow you to come in the event and sell<<

According to one of the most respected analysts of U.S. tax law, William Shakespeare, "A rose by any other name would smell as sweet." This is a mnemonic for the "substance over form" doctrine. It doesn't matter what you call it, an entry fee is an ordinary and necessary business expense.

[kcjenkins]

Jainen, while I want to agree with you on this one, I would have to look real hard at this one. MAS started by saying " The organization cannot accept a fee" and that, combined with the 'contribution' noted on the check means that this is a time bomb on an audit. So I'd really want to know the AMOUNT of that check before I decided. If it's a small amount I'd go your way with it, but if it is a big one, I'd have a lot of questions first. Especially I want more details about that " The organization cannot accept a fee "

[jainen]

>>The organization cannot accept a fee<<

That's because they choose to evade taxes on UBTI. Well, we aren't doing their tax return, so it's not our problem. We want to know what it is for the payer. A different taxpayer might make an identical payment to the non-profit as a charitable contribution, but in the original post there is a clear business purpose.

Page 44 of Pub 535 addresses the matter directly, with a couple of good examples. One is payment for an ad in a church bulletin. The other is a "donation" to a chamber of commerce. According to the IRS, both are legitimate business deductions, not charitable contributions.

[OldJack]

I have to agree with Jainen. The church can call it what they want, but it is still an entry fee and an ordinary and necessary business expense for the payer. The amount is irrelevant and the preparer should never consider the amount as a decision factor.

[MAMalody]

One thing you might look at is whether anybody was allowed in without the "contribution." If the answer is no, it was more clearly a fee. If the answer is yes, it probably was a contribution.

[jainen]

>>whether anybody was allowed in without the "contribution."<<

Aside from the impracticality of such a survey, I doubt it could generate meaningful data. The organization probably has all sorts of different arrangements for regulars, related organizations, "major draws," influential contacts, favored booth locations, whatever. Even if the company could have gotten in free, so what? Pub 535 says "an expense does not have to be indispensable to be considered necessary."