Can Donating Inventory Provide a Tax Break?

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by Tim Ayler, CPA | Partner and Director of the Construction Services Group

As the year end approaches, many companies are beginning to worry about paying taxes and begin looking for those tax deductions that are not obvious to them. This is about the time when I usually get a question about donating inventory as a tax deduction, and whether it would be beneficial to get rid of slow moving inventory in order to take advantage of a tax break.

If your company is a C corporation (not an S corporation, partnership or LLC), then inventory that you planned to sell to customers in the ordinary course of business MAY be able to be donated to a charitable organization and receive a charitable contribution for the basis (typically the cost) of the inventory, plus one half of the profit you would have made if you had made the sale. The deduction cannot exceed twice the basis of the inventory.

To qualify, the inventory donated must be made to a qualified public charity or a private operating foundation. The recipient must use the inventory for the care of infants, the needy or the ill. The donor must also receive a written statement from the charity representing that the use of the donated inventory will not be transferred by the charity in exchange for money, property, or services AND will be used for the care of the ill, needy, or infants.

Example #1

A water heater costing $200 (normally sold for $400) is donated to a qualified charity. The amount of the charitable contribution would be $300.

Example #2

A tree costing $200 (normally sold for $600) is donated to a qualified charity. The amount of charitable contribution would be $400 (maximum of twice the basis).

For an S Corporation, there is not an opportunity to receive a charitable contribution for any more than the cost of the inventory that is donated.

If you have any questions, please feel free to contact Tim Ayler at (317) 260-4401 or tayler@greenwaltcpas.com, or any of the Greenwalt CPAs’ staff that you work with.