“Donating Inventory May Lead to Tax Savings” by Mark Lapikas, CPA, MTax | Senior Manager – Tax
Does your business have obsolete, unwanted, or an overstock of inventory? If so, you could find tax savings by donating that inventory. The federal tax law provides a deduction for inventory contributed to a qualified charitable organization. Many businesses find it costly to store slow moving or dated inventory. Donating inventory can provide a means to save money and help the community.
Deduction Rules By Entity Type
In general, the tax deduction available for donated inventory is limited to the taxpayer’s adjusted basis in the inventory. However, an exception exists for donated inventory by a C corporation. A C corporation is eligible to deduct the cost of the inventory donated plus half the difference between the cost and fair market value of the inventory. The deduction for a C corporation is limited to twice the cost of the inventory.
For example, if a C-corporation donates inventory to a qualified charity which cost $10,000 but has a market value of $25,000, the tax deduction is limited to $17,500. The deduction is calculated as the cost basis ($10,000) plus half the difference ($7,500) between the cost basis and fair market value of the inventory.
As for businesses structured as an S corporation, partnership, LLC, or sole proprietorship, the tax deduction for donating inventory is limited to the cost of the inventory. For these entities, the deduction for donated inventory to a qualified charity is claimed as an itemized deduction on a taxpayer’s personal income tax return.
In addition, there are special rules to be considered for certain types of inventory donated, such as food inventory and intellectual property.
As a business approaches year-end, it should consider reviewing the inventory stored at its facility and warehouses to determine if it makes sense to donate, rather than store, dated inventory. If inventory is identified to be donated, contact your trusted advisor at Apple Growth Partners to discuss the inventory and ensure that proper documentation is in place to support claiming a federal tax deduction.