What are the Rules for Charitable Contributions of Inventory?December 15, 2020
Looking to donate excess inventory to your favorite charitable organization? You’re in luck—a tax deduction could be in your future.
Editor’s Note: This blog has been updated as of December 15, 2020 for accuracy and comprehensiveness.
Wondering if you can donate excess inventory to a good cause? The Internal Revenue Code allows a company to get a charitable contribution deduction for donations of inventory. Additionally, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) enhances this deduction for contributions made during calendar year 2020…see if you qualify.
What are the rules?
Under a general IRS rule, C corporations are allowed a tax deduction for charitable contributions of inventory (besides money). The charitable contribution, to be deductible, must be:
- Made to a qualified charitable organization- Typically this means the inventory can be given to any 501(c)(3) organization.
Non C corporations can deduct an amount equal to the lesser of the cost basis or the fair market value of the inventory.
Any requirements on what inventory can be donated?
The inventory can be virtually any property a business owns (other than money). This includes intangibles like patents, copyrights or trademarks. The main requirement is that the donated items have value. There is an enhanced deduction for donations of food items.
When is the contribution deductible?
The charitable donation is deductible in the year in which the contribution is actually made. A corporation using the accrual method of accounting is allowed to deduct the contribution in the year it is accrued. The board of directors must authorize this contribution, and the contribution has to be made by the 15th day of the third month after the end of the fiscal year.
How much of a deduction can be taken?
Generally, the amount is the lesser of the fair market value (FMV) of the donated item or its cost.
What if your company did not include the cost in beginning inventory?
If this is the case, the cost basis will instead be 0 and no deduction is allowed.
Any chance for a larger deduction?
A deduction equal to FMV plus one half of the excess of the property’s FMV over its adjusted basis is allowed on inventory that meets a few qualifications....
- Is related to the recipient’s exempt functions;
- Is used to care for the ill, elderly or infants;
- Is not transferred to the recipient in exchange for money, other property or services;
In addition to this, the donor must receive a statement from the recipient that the above conditions will be complied with.
If the amount of deduction exceeds $500, the corporation must include a description of the property on its tax return. If more than $5,000, the corporation must obtain an appraisal. If greater than $500,000, the appraisal must be attached to the return.
What did the CARES Act change?
The CARES Act temporarily increases the deduction limitation for charitable contributions of food inventory for contributions made in 2020.
In the past, charitable contributions could only be deducted if taxpayers itemized their deductions. In 2020, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made to qualifying organizations.
The CARES Act also eliminates the limit on cash gifts of individuals to public charities.
Lastly, it increased the limit on charitable contributions from corporations to 25% of taxable income including donations of qualified food inventory. The deduction for contributions of qualified food inventory for individuals is increased to 25% as well.
Is there a limit on tax deductions for charitable contributions?
Yes, during a tax year your total charitable contribution deduction cannot exceed:
- 10% of the corporate taxable income
- 15% if food inventory
- 25% under the CARES act if donated food inventory in 2020.
There are some things you should consider before making non-cash charitable contributions, including tax treatment of different types of donations. Check out our blog for more.
Don’t forget to check out our Year End Tax Planning Guides for Businesses and Individuals.
Reach out to our Tax Services Team for more info.