Can a Business Take a Tax Deduction for Donating Excess or Obsolete Inventory to Charity? | Chron.com
You can sometimes receive valuable tax incentives by donating your old inventory.
Tax Rules for Deducting Obsolete Inventory
Do You Show a Write-off for Obsolete Inventory on the Income Statement?
Accounting Methods for Obsolete Inventory by GAAP
Accounting for Obsolete Inventory
Accounting for Distressed Inventory
What Causes Obsolete Inventory to Rise?
Getting rid of your excess or obsolete inventory can help you free up needed warehouse space, avoid hefty storage fees, focus on the products that do sell and avoid having to liquidate items. You may be able to donate some inventory to charities in order to receive a valuable tax deduction if your donation meets certain requirements.
The Internal Revenue Service allows businesses to donate excess inventory to charity and provides incentives to encourage this action. However, a business cannot donate inventory that is in quantities above those needed for the normal course of business. The incentive is applicable if the charitable organization can use the item to meet the stated mission of the organization. Items that can be donated are those items that are normally sold in the course of business, such as clothing, food or furniture. You cannot donate items that will personally benefit you, such as if you provide items for the room in a retirement home that you expect to occupy.
Obsolete inventory may exist if items are no longer in season, have expired or are outdated for the purposes of your business. Items may also become obsolete if your business needs change. For your obsolete inventory to qualify for a tax deduction, it must still retain some value and must be able to be used by the charitable organization. Forklifts, conveyor systems and factory equipment are a few examples of items for which you can receive a tax deduction. However, the donation of a typewriter to a charitable organization that will not use it to create written communication will not qualify for the tax deduction.
Giving your excess or obsolete inventory to any charity may not qualify you for the tax deduction. Only charitable organizations that are listed as 501(c)(3) organizations will qualify you for the tax deduction. Schools, hospitals and orphanages are some examples of these types of organizations. If you’re in doubt, you can ask the charity about its status.
Amount of Deduction
For sole proprietorships, S corporations and partnerships, the tax incentive is a straight cost deduction. This means that if the fair market value of your item is $100, your tax deduction will be $100. If your business operates as a C corporation, you may be able to get a larger tax deduction. The larger deduction is available if the charity provides you with a written statement indicating that your donation meets several requirements. For example, the charity must use the property in the intended manner; must use it for caring for the ill, the financially needy or infants; and cannot sell the property.
How to Claim the Deduction
Request a receipt for your charitable contribution. Schedule A on Form 1040 should be completed to record the transaction for partnerships, S-corporations and LLCs. A sole proprietor should list the information as an itemized deduction on his tax return. You will also need to complete Section A of Form 8283 if any one item has a value of $500 or more. Submit these forms with the rest of your tax return.
Internal Revenue Service: Publication 526: Charitable Contributions
Educational Assistance LTD: Put Your Excess Inventory Back to Work Now!
MKS&H: Turning Lemons into Lemonade: Dealing with Excess Inventory
Money Matters: Cut Your Taxes by Using Your Excess Inventory
Waste to Charity.org: Examples: Donating Inventory to Waste to Charity