How to Account for Product Given Away

Businesses often distribute products without direct sales, such as for marketing campaigns, charitable giving, or managing damaged goods. Accurately accounting for these giveaways is important for clear financial reporting, tax compliance, and informed decision-making.

Categorizing Product Giveaways

The accounting treatment for product giveaways depends on their underlying purpose. Marketing and promotional samples are products provided to potential customers for trial or marketing initiatives, aiming to generate future sales.

Charitable donations are products given to non-profit organizations, serving community benefit and potentially offering tax advantages. Employee gifts or benefits are products provided to employees for recognition, compensation, or special events, often used to boost morale or as non-cash remuneration.

Damaged, obsolete, or unsellable products might be disposed of or given away, addressing items leaving inventory due to loss in value. Customer service or warranty replacements are products supplied to customers to resolve issues or honor guarantees, ensuring satisfaction and fulfilling post-sale obligations.

Valuing Given Away Products

Accounting for product giveaways uses the product’s cost to the business, not its retail selling price. This aligns with inventory valuation on the balance sheet, representing acquisition or production cost. When inventory leaves without a sale, its cost is removed from the inventory asset account.

Businesses commonly employ various methods to ascertain this cost, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Weighted-Average Cost. FIFO assumes the first goods purchased or produced are expensed first. LIFO assumes the most recently acquired goods are expensed first. The Weighted-Average Cost method calculates an average cost for all inventory items.

For most internal accounting entries, the cost basis provides a consistent reflection of resources consumed. However, for specific purposes, such as certain charitable donations, the fair market value of the item may also be relevant for tax considerations. Fair market value represents what the product would sell for on the open market at the time of the donation. This distinction is important for tax deductions, though the internal accounting entry for inventory removal still uses the cost.

Recording Accounting Entries

When products are given away, specific journal entries are necessary to accurately reflect the reduction in inventory and the corresponding expense.

Marketing and promotional samples debit an expense account (e.g., “Advertising Expense” or “Marketing Expense”) and credit “Inventory.” For example, a $500 sample giveaway debits Marketing Expense for $500 and credits Inventory for $500.

Charitable donations debit “Charitable Contributions Expense” and credit “Inventory” or “Cost of Goods Sold.” A $1,000 donation debits Charitable Contributions Expense for $1,000 and credits Inventory for $1,000.

Employee gifts or benefits debit “Employee Benefits Expense” or “Compensation Expense” to reflect the non-cash benefit, and credit “Inventory.” A $100 gift debits Employee Benefits Expense for $100 and credits Inventory for $100.

For damaged or obsolete products, a loss is recognized by debiting “Inventory Write-Off Expense” or “Loss from Damaged/Obsolete Inventory” and crediting “Inventory.” A $200 write-off debits Inventory Write-Off Expense for $200 and credits Inventory for $200.

Customer service or warranty replacements debit “Warranty Expense” or “Warranty Liability” to reflect the cost to fulfill the warranty, and credit “Inventory.” A $75 warranty replacement debits Warranty Expense for $75 and credits Inventory for $75.

Understanding Tax Implications

Businesses must understand the tax implications associated with product giveaways, as these affect deductibility and reporting requirements. Expenses for marketing and promotional purposes, including product samples, are considered ordinary and necessary business expenses and are fully tax-deductible. These deductions help reduce a business’s taxable income.

Business gifts given to clients or customers have a specific deduction limit. The IRS limits the deduction for business gifts to $25 per recipient per year. Promotional items costing $4 or less, with the company’s name permanently engraved and distributed regularly, are exempt from this $25 limit.

Product gifts to employees are considered taxable income to the employee and must be reported as wages on their W-2 form. Limited exceptions exist for “de minimis” fringe benefits, which are small, infrequent gifts of minimal value where accounting for them would be impractical. Examples include a holiday turkey or low-value items like pens with the company logo.

Charitable contributions of inventory to qualified organizations are deductible, but rules vary. C corporations may be eligible for an enhanced deduction, limited to twice the cost basis. Other business entities, such as sole proprietorships, partnerships, and S corporations, deduct only the cost basis of the donated inventory. Proper documentation, including a description of the inventory, donation date, and value, is essential for claiming these deductions. For contributions exceeding $5,000, a qualified appraisal and IRS Form 8283 may be required.