Tax Facts

Small Business Inventory and Charity

What if you have a small business such as a sole proprietorship that files on Schedule C and you want to contribute some of your inventory to charity? How should you account for that? There are some things to consider regarding charitable contributions of inventory before you do so.

First, consider that unfortunately, charitable contributions of any kind cannot be deducted on Schedule C. They are deducted on Schedule A of your personal tax return as itemized deductions. Obviously, you should consider whether or not you even itemize your deductions or take the standard. And with the new tax legislation that is going into effect for 2018, you may have itemized in the past but will not in the new year.

Second, consider that when given to charity, inventory accounting has to, well, account for that. Which means you follow those rules and adjust your inventory for the smaller of the cost (basis) of your items donated or the fair market value (FMV) at the time of contribution. That value must be removed from your inventory accounting for cost of goods sold (COGS).

In general, you should also consider the amount you plan to donate, as this can also effect the overall equation of whether or not it benefits you to donate your inventory.

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