But I think what we are talking about here is, how to claim a schedule A deduction for donation of inventory.
For an item bought in 2018 (and declared as inventory) and then donated in 2019, the IRS says:
"If you contribute inventory (property you sell in the course of your business), the amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your charitable contribution deduction from your opening inventory. It isn't part of the cost of goods sold."
So goods bought in 2018 and donated in 2019 must be removed from the 2019 opening inventory, and are donated with a basis of the purchase price in 2018. That means the donated items are not part of COGS. This means that you reduce your business expenses on schedule C, and list the items on schedule A instead.
But what if you don't want to list them as a donation on schedule A. Pub 526 doesn't apply. The items simply disappear and are listed as COGS but never actually sold. Suppose we have 5 outcomes; the items are sold for 1 penny; the items are damaged by insects or water or fire and are declared worthless; the items are lost or stolen; the items are given away to a friend or long-time customer as a promo; the items are given away to Goodwill. In each case, the item is removed from inventory, the business owner recognizes cost but no revenue, and their income subject to income and SE tax is reduced.
Having the item removed from inventory for no sale (such as given to a friend as a promo) results in a larger tax savings than removing it from inventory and making a personal donation on schedule A. Is there a tax reason why the items can be lost or destroyed but not given to a charity (not to be listed as a donation, simply as items removed from inventory for no sales value.)
