Can your business donate inventory to charity?
Businesses that donate inventory to charity need to be aware of the tax law’s rules for this type of charitable giving. Here’s an overview.
A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.
Basis of contributed inventory
The basis of contributed inventory is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.
If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.
Enhanced Deductions
Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction. The IRS requires special documentation for certain charitable contributions. Typical requirements include disclosure on the taxpayer’s tax returns, documentation of fair market value, and documentation of receipt of property by the charity.
From Accounting Today
Under Code Section 170(e)(3), if a C corporation donates its unwanted inventory to qualified nonprofits, it can receive a federal income tax deduction up to twice the cost of the donated products. Deductions are equal to the cost of the donated inventory, plus half the difference between the cost and fair market-selling price, not to exceed twice the cost.
Please contact Hedley & Co, CPAs with any accounting or tax questions you have.
Source: Client Line newsletter