Cash For Clunkers sofas? Be careful about tax implications

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The New York Times reports on a new trend that seems to be sprouting up in the furniture business: Buy a new sofa and get a discount by "trading in" your old one, which is then donated to charity.

Here's where it might get just a little bit complicated. According to the Times, "At Pacific Manufacturing in Phoenix, which sells custom upholstered goods to interior designers, a used piece of furniture earns clients 10 percent off the purchase of any new furniture item or mattress and, after the clunker is delivered to a local charity, a tax-deduction receipt."

The problem? It could get you in hot water with the IRS. I asked forensic accountant Tracy Coenen to explain it: "You can only take a deduction for the amount in excess of the value you received. If the person donates a piece of used furniture with an estimated fair market value of $50, but receives a $125 discount on the purchase of new furniture under this deal, they should not take a deduction for a charitable contribution. If the person donated a piece of used furniture with a fair market value of $500, and receives a discount of $200 on the purchase of new furniture, they could take a deduction for a charitable contribution of $300."

Would you get caught donating it, getting the discount, and deducting it? Of course not: How will the IRS ever know about the discount you received? It's just a question of whether you really want to be a tax cheat, no matter how small the scale.

Coenen also notes that the "fair market value" for used furniture is extremely low -- meaning that it's highly unlikely that you'll be able to get a valuation that would leave you room for a tax deduction after taking the 10% discount.

Unless of course your clunker is an early Eames chair with the Brazilian rosewood veneer.
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