Can You Deduct the Value of a Donation of Inventory?
Understand how to navigate tax rules for inventory donations, including deduction limits, reporting requirements, and necessary documentation.
Donating inventory allows businesses to support charitable causes while potentially benefiting from tax deductions. However, IRS rules for these contributions differ from those for cash or other assets. Understanding these regulations ensures compliance and maximizes tax benefits.
Determining the Deduction
The deductible amount depends on how the inventory was accounted for and the type of organization receiving it. Generally, businesses can deduct the lower of the inventory’s fair market value or its cost basis. Fair market value reflects the price the inventory would sell for in an open market, while cost basis represents the amount paid to acquire or produce the goods.
C corporations may qualify for an enhanced deduction if the donation is made to a qualified charitable organization that uses the inventory to aid the ill, needy, or infants. Under Section 170(e)(3) of the Internal Revenue Code, this deduction equals the cost basis plus half the difference between cost and fair market value, as long as it does not exceed twice the cost basis. For example, if a corporation donates inventory with a cost of $10,000 and a fair market value of $25,000, the enhanced deduction would be $17,500 ($10,000 + [$15,000 ÷ 2]), since this amount does not exceed twice the cost basis.
Pass-through entities, such as S corporations, partnerships, and sole proprietorships, do not qualify for the enhanced deduction. They can deduct only the cost basis of donated inventory because their income and deductions pass through to individual owners, who must claim them on personal tax returns.
Tax Reporting Considerations
Businesses must report inventory donations correctly on their tax returns. C corporations claim deductions on Form 1120, while pass-through entities report them on their respective business tax forms before passing them to individual owners. If the deduction exceeds $500, Form 8283 must be filed, detailing the donated property, recipient organization, and valuation method.
Deductions can only be claimed for donations completed within the tax year. Businesses using the accrual method may deduct a pledged donation in the current year if they document an irrevocable commitment, even if the transfer occurs shortly after year-end.
State tax treatment may differ from federal rules. Some states do not follow IRS guidelines, while others offer additional incentives or impose restrictions. Businesses operating in multiple states should verify how these donations are treated at the state level to ensure accurate filings.
Documentation Requirements
Proper documentation is essential to substantiate deductions and protect against audits. Businesses must maintain records supporting valuation, recipient eligibility, and the nature of the donation.
A written acknowledgment from the charitable organization is required, including the nonprofit’s name, a description of the donated inventory, and a statement confirming whether any goods or services were received in return. Donations exceeding $5,000 may require a qualified appraisal unless the inventory consists of readily marketable securities or publicly available commodities. The appraisal must be conducted by a certified professional and meet IRS standards.
Businesses that manufacture inventory should retain records of production costs, including invoices for raw materials, labor, and overhead. For perishable goods, such as food or pharmaceuticals, records of expiration dates and storage conditions should be kept to confirm the items were suitable for use at the time of donation. These details are particularly relevant when claiming enhanced deductions for food donations under Section 170(e)(3)(C).