Insuring Unsold Inventory
Will fire and theft insurance cover the whole value of a piece that is lost before it's sold, or just the cost of materials? It's a tricky issue. July 18, 2008
Question
I was told by my accountant that if I ever had a loss and made a claim on my custom projects (non-commissioned or un-sold), I would only be able to claim the dollar amount that I spent for materials and nothing for time or finished product. The only way I see around this is to have someone agree to "purchase" each piece I build on paper, or have it appraised. My fear is fire or theft and not being able to recover my lost time. Has anyone else run into this?
Forum Responses
(Furniture Making Forum)
From contributor G:
Be careful about that. If your unsold pieces in inventory suddenly have a high value, the insurance rates may go up and the tax department may want a cut. Loss of Time insurance... that's an interesting concept.
From contributor H:
Your accountant is right.
Loss of time insurance? What!? Sort of like wishing for affordable health insurance. Having someone buy it on paper? Sounds a lot like fraud to me. Sounds a lot like jail too!
From contributor J:
My insurance inspector/adjuster allows for work in progress if there is a claim. They insured a piano factory that burnt down a few years back. It was full of finished and partially finished pianos.
From contributor C:
Our insurance has a value for unfinished work in progress, it just needs to be discussed and added as a line item in your policy. Not really an issue in FL.
From contributor D:
This works the same way as donations. A nonprofit group approached me for donating a piece of furniture. At the time, I had a cabinet in my shop for sale, so I donated that to the organization. They gave me a receipt for the price I was asking, but when tax time came around, my tax man said I couldn't deduct the full price. Only the cost of materials could be deducted. That was the last time I donated anything I made. Now I just donate cash or a gift certificate. Then it's all deductible.
From contributor A:
I've done some research in this area with my accountant. My situation is legally similar, but for a different reason. In addition to building commercial pieces, I'm building heirloom pieces for my children (grown with their own families).
What we decided to do is bill my kids for the furniture at nearly full cost and they pay me. I then gift the children the money back. I pay full taxes on the money received from the kids, as this is now income. This allows me to make normal deductions for materials, shop overhead, insurance, etc. The IRS doesn't care who I give money to, as long as I pay all the appropriate taxes on any income.
A modified version of this works for charities. Basically, I sell the piece to the charitable organization at a very reasonable price, one that guarantees that they will make a sizable profit. There are three possible outcomes from the charity's perspective: (1) the charity makes a nice profit, (2) the piece sells for about what the charity paid leaving the charity with nothing, and (3) the piece doesn't sell or won't fetch the minimum price. In case 3, the charity simply returns the piece for a full refund.
In none of the above cases does the furniture maker end up getting credit for a charitable deduction. However, in case #1 the materials, shop overhead, and discounted labor are recovered. The charity has made money, and everyone feels good. Just remember that the money the charity pays is income and the appropriate taxes must be paid.
This may sound terribly convoluted, but remember we're dealing with the IRS. They've got the guns, they make the rules. These are workarounds to allow at least some costs to be deducted beyond just materials.
From contributor M:
That is basically what my thoughts were. Is there such a thing as having "custom heirlooms" appraised/authenticated? Getting a certificate stating wood types, joinery, hand made, fair market value, etc.?
From contributor H:
There is a difference between appraised price and selling price when it comes to "heirlooms" (aka new antiques). What you are asking to do still doesn't sit right. Get any appraiser to give you half of what he says its appraised value is. They won't. They should because they can sell it for what they appraised it for, right? It's one thing to sell it to your family and get tax credits that way. It's another to have everything you produce always bought and paid for on paper, even if it's not.
Previous posters are correct about the work in progress or undelivered product in a loss. But you only get what the product was sold for. For real! Have a reciept, have a live client, have a record of monies received, etc. The tax people and insurance companies have seen and heard it all.
From the original questioner:
That's all well and good. What doesn't sit well with me is if I build a $10,000 piece of furniture from $2500.00 of lumber between jobs, put it in my showroom to sell, and have a fire or a break in, and lose it. Then all I am entitled to is the $2500.00, when it would have sold for well over twice that. Something is not right there. A pile of lumber wasn't lost - a piece of furniture was. I'm not trying to get over on the IRS. I just want to cover my ass if something were to happen. Sorry I was not more to the point about buying and selling on paper. I was implying what contributor A said, selling and gifting the money back.
