The Basics
Inventory is generally considered ordinary-income property. If donated inventory was included in your opening inventory for the year, your charitable deduction generally is limited to the lesser of its tax basis or fair market value (FMV). You generally must adjust your inventory and cost-of-goods-sold calculations so you don’t deduct the donated inventory twice.
If you donate items in the same year you bought them and their cost has already been reflected in cost of goods sold or otherwise recovered under your accounting method, you generally can’t also claim a charitable deduction for donating the inventory itself.
Keep in mind that slow-moving, obsolete or damaged goods may be worth less than their original cost, potentially reducing the deduction because it’s generally limited to the lesser of basis or FMV. So consider the goods’ current FMV when deciding whether donating them makes financial sense.
Enhanced Deductions
Certain donations may qualify for an enhanced deduction. For example, in some cases C corporations may be eligible to deduct the lesser of:
- The inventory’s basis plus one-half of its appreciation, or
- Twice its basis.
These higher limits may apply when qualifying inventory is donated to certain charitable organizations for the care of the ill, needy or infants. Specific requirements apply, including rules governing how the charity uses the property and a written statement from the charity.
Special enhanced-deduction rules also apply to donations of apparently wholesome food inventory and can benefit businesses other than C corporations.
Documentation and Filing
Proper documentation is essential. Generally, you’ll need a contemporaneous written acknowledgment from the charity.
You also may need to file Form 8283, “Noncash Charitable Contributions,” and obtain a qualified appraisal. Form 8283 filing requirements can vary for donated inventory, and certain inventory is exempt from the qualified appraisal requirement.
Year-End Considerations
Before donating excess inventory, determine its basis and FMV and confirm that the recipient and intended use satisfy applicable requirements. Contact the office for help evaluating the potential deduction and documentation requirements and determining whether a year-end donation fits your business’s tax strategy.
