Inventory Donation Tax Deduction Guide
How companies can deduct donated inventory, and how the enhanced deduction under IRC Section 170(e)(3) works.
Donating unsold product can cost less than destroying it once you count the deduction. Here is the plain English version of the rules.
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Standard vs enhanced deduction
When a business donates inventory, the deduction is usually limited to the cost basis of the goods. Congress created an enhanced deduction in IRC Section 170(e)(3) to encourage companies to donate inventory to charities that serve people in need.
| Standard inventory deduction | Enhanced deduction, Section 170(e)(3) | |
|---|---|---|
| Who | Most businesses | C corporations for general inventory. All business types for food. |
| Amount | Generally cost basis | Generally cost basis plus half the gain, capped at twice cost basis |
| Recipient | Qualified charity | Qualified 501(c)(3) using the goods for the care of the ill, the needy or infants |
| Paperwork | Written acknowledgment | Written acknowledgment plus a signed statement of use from the charity |
A simple example
Say a C corporation donates product that cost $10,000 to make and would sell for $30,000. Half the difference between value and cost is $10,000, so cost plus half the gain is $20,000. Twice cost basis is also $20,000. The enhanced deduction could be up to $20,000, compared with $10,000 under the standard rule. Real results depend on your numbers, your entity type and annual limits.
Requirements to keep in mind
- The recipient must be a qualified 501(c)(3) organization.
- The goods must be used for the care of the ill, the needy or infants.
- FDA regulated products such as food, supplements and cosmetics must meet FDA requirements on the date of donation and for the 180 days before.
- The charity cannot sell or trade the goods for money, property or services.
- You need a written statement from the charity confirming the above.
- Annual charitable deduction limits based on taxable income apply.
How we help
We place your inventory only with recipients that meet these requirements when you tell us you plan to claim the enhanced deduction, and we deliver the acknowledgment, signed statement of use, bill of lading, photos and itemized list in one package for your accountant.
Tax Deduction Questions
Which companies qualify for the enhanced deduction?
Under IRC Section 170(e)(3), C corporations can claim the enhanced deduction for donated inventory used by a qualified charity solely for the care of the ill, the needy or infants. For donated food, the enhanced deduction is available to all business types, including S corporations, partnerships and sole proprietors, subject to income limits.
How is the enhanced deduction calculated?
Generally it is the lesser of (a) your cost basis plus half of the difference between fair market value and cost basis, or (b) twice your cost basis. A standard deduction for inventory is usually limited to cost basis. Your CPA will apply the rules and limits to your situation.
What documentation do I need?
A written acknowledgment from the nonprofit describing the donated property, and for the enhanced deduction, a written statement from the nonprofit that the goods will be used for the care of the ill, the needy or infants and will not be transferred for money, property or services. Keep your cost records and fair market value support as well.
Do you provide that documentation?
Yes. We collect the nonprofit’s acknowledgment and signed statement of use and send them to you with the bill of lading, photos and itemized list.
Are you giving tax advice?
No. We are not tax advisors and this page is general information. Please confirm eligibility, valuation and limits with your CPA before filing.
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Get a quote and we will document every pallet.