Can I deduct the value of unsold inventory if it's donated to a charity? Where do I enter this? Is it a personal deduction or other?

[TaxGuyBill]

Do you report the "Inventory" in the Inventory/Cost of Goods Sold section of TurboTax?  Or do you enter the expenses as a 'Supply' or something when you buy it?

Were these items that were bought in previous years?  Or was the charitable contribution in the same year as you originally bought the item?

[mbhebert]

Yes, I do report inventory. Yes, they were purchased in 2018. I am trying to decide how best to dispose of them to make room for new inventory. For a variety of reasons, I don't like to deep discount inventory online (it tends to condition people to wait for the closeouts instead of buying when the new season's line is available). This is women's apparel, all brand new, not damages. Just odd pieces, broken size runs.

[Opus 17]

Also at this point, if you have not filed a 2018 tax return yet for the business, and have not deducted the items as inventory, be aware that any donation would be on your 2019 tax return, not 2018.

[TaxGuyBill]

On your 2019 tax return, you would enter it as Inventory withdrawn for personal use.  Then you add that (usually your cost) as a personal charitable contribution.

[Opus 17]

But you lose the SE tax deduction.  Isn't it better for the business to donate it?  (or burn it, or lose it?)

[TaxGuyBill]

It would be better, but it is not allowed (except maybe for inventory bought the same year it is donated).  I'll see if I can find a reference.

[TaxGuyBill]

<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p535#en_US_2018_publink1000209185">https://www.irs.gov/publications...>

[TaxGuyBill]

"You must remove the amount of your charitable contribution deduction from your opening inventory. It isn't part of the cost of goods sold."
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p526#en_US_2017_publink1000229740">https://www.irs.gov/publications...>

[Opus 17]

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.)

[TaxGuyBill]

But it is NOT a business expense.  Although the first link is referring to cash donations, the same applies to Inventory - "If the payments are charitable contributions or gifts, you can’t deduct them as business expenses".  Giving it to charity or to a friend (without a clear, definite business purpose) is not a business expense.

The first 4 of your 5 outcomes have a business purpose.  Donating to charity is not a business purpose.

[Opus 17]

Probably not.  If you deducted the cost of the inventory as a business cost, you already got a deduction.  Your cost basis is zero.  Generally, when you donate an item, your maximum deduction value is the fair market value or your cost basis, whichever is lower.  (In this case, zero.)  You deduct cost of goods sold, and you don't report any income from the items; that's your tax reduction.

[mbhebert]

I have not deducted it from inventory yet, so I haven't taken any deduction. Wondering if there's a benefit to doing it that way versus claiming it as a charitable donation (at the cost I paid to acquire it).

[Opus 17]

That depends on whether your business is ongoing.  If you deduct the cost and don't have revenue, your business taxes will be lower, that includes income tax and 15% SE tax (for schedule C businesses.)  An itemized charitable deduction only reduces your income tax, not your SE tax, and only if your total itemized deductions are more than your standard deduction.

If you closed the business, and have no revenue, and you want to treat these purchased items as personal purchases, then you might see more benefit as a personal deduction.

However, the donation value is your cost, or the current FMV, whichever is lower.  If your inventory is not worth now, what you paid for it then, you can't deduct the purchase price.  That will depend on what it is, it's age and condition, and the market. (For example, a 2017 model flat screen TV will not be worth it's 2017 price in 2019, even if it is mint in box.)

[mbhebert]

Thank you--very helpful.