The Piled-up Inventories May Be Worth More Than You Think! (English Version)

Businesses with excess, non-moving inventory can benefit by donating it to charity, as they can earn a federal income tax deduction under Section 170(e)(3) of the U.S. Internal Revenue Code. This deduction allows regular C corporations to deduct the cost of the donated inventory, plus half the difference between the cost and fair market value, up to twice the cost. Other types of businesses, such as S corporations, partnerships, LLCs, and sole proprietorships, can qualify for a straight cost deduction.

Donating stagnant inventory offers several advantages, including freeing up warehouse space, helping achieve Just-in-Time inventory levels, and allowing businesses to focus their marketing efforts on top-selling items. It also helps avoid the challenges of liquidating excess inventory and benefits deserving nonprofit organizations.

As mentioned above, a C corporation may qualify for an enhanced deduction when donating inventory for the care of the ill, needy, or infants. This deduction is based on the cost of the donated inventory plus half the gross profit it would have generated if sold at its fair market value.  The claimed deduction, however, may not exceed twice the basis of the property under Sec. 170(e)(3).

Unlike other property, Sec. 170(f)(11)(A)(ii) does not require an appraisal for contributions of inventory because inventory is generally valued annually by the taxpayer. The fair market value (FMV) of inventory contributed to a charity should be documented by the donor based on the facts and circumstances at the time of the contribution.

For charitable contributions of inventory with more than $500 of increased deduction, the IRS requires the taxpayer to file Form 8283, Noncash Charitable Contributions, with its income tax return. Section A of the form should be completed for contributions for which the taxpayer claims less than $5,000 of increased deduction and Section B for contributions for which the taxpayer claims more than $5,000 of increased deduction. If the increased deduction is greater than $5,000, an authorized representative of the donee should sign Form 8283 acknowledging the receipt of the property. In addition, a statement should be attached computing the amount of increased deduction for the inventory.

Note that this enhanced inventory donation deduction is available to C-corporations and is more suitable for companies carrying consumer products that are readily available to charities for the charitable purposes discussed above.

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