Donating Inventory to Charity: Rules, Limits, and Recapture

The tax deduction for donating inventory to charity generally equals your cost basis in the goods, not their retail value. C-corporations and any business donating food get access to an enhanced formula worth basis plus half the appreciation, capped at twice basis. The deduction only works if the recipient is a qualified 501(c)(3), the paperwork matches the size of the gift, and you adjust cost of goods sold so the same cost is not deducted twice.

What Most Businesses Can Deduct

Sole proprietorships, partnerships, LLCs, and S-corporations deduct the smaller of the property’s fair market value on the date of donation or their basis in the property.¹ Because inventory is ordinary income property, that formula almost always resolves to cost basis whenever the goods have appreciated.

The step people miss is the cost of goods sold adjustment. If the donated inventory was part of your opening inventory for the year, you remove the deducted amount from opening inventory so it does not also flow through COGS. You cannot take a tax benefit for the same cost twice.¹

There is a separate trap for goods bought and donated in the same year. If the cost was never part of your opening inventory, your basis for charitable deduction purposes is zero. The purchase price still runs through COGS under your normal method, but you do not get a charitable deduction on top of that.¹ Businesses that buy specifically to donate often expect two bites and get one.

A quick illustration: inventory that cost $8,000 with a current fair market value of $12,000 produces an $8,000 deduction. You then pull that $8,000 out of opening inventory so it does not also reduce your taxable business income through COGS.

When the Goods Have Lost Value

If the inventory is damaged, obsolete, or otherwise worth less than you paid, the deduction is limited to fair market value. You cannot deduct the difference between what you paid and what the property is worth now.¹ Since businesses often donate specifically because inventory has lost value, the resulting deduction can be smaller than expected.

The Enhanced Deduction for C-Corporations

C-corporations can move beyond basis when the donated goods will be used by the charity for the care of the ill, the needy, or infants, or for qualified scientific research. The deduction equals basis plus half of the unrealized appreciation, and the total cannot exceed twice the basis.²

Take inventory with a $10,000 basis and $25,000 fair market value. The appreciation is $15,000, half of it is $7,500, and adding that to basis gives $17,500. The cap is twice basis, or $20,000, so the full $17,500 is deductible. Push the fair market value to $35,000 and the formula produces $22,500, which the $20,000 cap cuts down.

The charity must provide a written statement confirming the goods will be used for qualifying purposes and will not be transferred for money or other consideration. If those terms are broken, recapture kicks in.

The Enhanced Deduction for Food Donations

All business taxpayers, not just C-corporations, can use the enhanced formula for donations of “apparently wholesome food.” That covers food meeting quality and labeling standards even when it is no longer readily marketable because of appearance, freshness, grade, or surplus.²

The formula is the same: basis plus half the appreciation, capped at twice basis. The food has to go to a charity that uses it for the care of the ill, the needy, or infants. On top of the twice-basis cap, food inventory deductions are limited to 15% of the taxpayer’s aggregate net income from the trades or businesses that made the contributions, or 15% of taxable income for a C-corporation.²

Which Charities Qualify

The recipient must be a tax-exempt organization described in Section 501(c)(3), which covers most public charities, religious organizations, and educational institutions.³ Private foundations generally do not qualify for favorable treatment on inventory donations, though operating foundations are an exception.

For the standard deduction, the charity has to use the donated goods in a way related to its exempt purpose. If it simply resells them, the deduction is limited to the lower of basis or fair market value. The enhanced deduction requires a stricter use: care of the ill, the needy, or infants, or qualified research in the case of scientific equipment.² Get the charity’s written statement confirming the intended use before you claim it.

Annual Limits and the New 2026 Corporate Floor

Even a correctly calculated deduction runs into annual caps.

For individuals, partnerships, and S-corporations, noncash contributions of ordinary income property to a public charity are limited to 50% of adjusted gross income.¹ The 60% figure some people remember applies to cash gifts, not inventory. Contributions to certain private foundations face a 30% cap.⁴ Anything over the annual limit carries forward for up to five years.²

C-corporations have their own 10% of taxable income cap on total charitable deductions, with the same five-year carryforward. Starting with tax years beginning after December 31, 2025, the One Big Beautiful Bill Act (P.L. 119-21) adds a 1% floor. Only the portion of a corporation’s charitable contributions exceeding 1% of taxable income is deductible, up to the 10% ceiling.² For a corporation with $1 million in taxable income donating $50,000 of inventory, the first $10,000 produces no deduction and the remaining $40,000 is deductible. This is a real change for corporations whose giving is modest relative to income.

Valuing the Inventory

Fair market value is the price a willing buyer and willing seller would agree on, with neither under pressure and both reasonably informed.⁵ For inventory, that is not the retail sticker price. The IRS looks at the price at which similar quantities actually change hands. A pallet of clothing donated to a shelter would typically be valued at wholesale, not what a consumer pays for one item at retail.

Replacement cost is generally not a reliable proxy. The IRS notes there is usually no direct relationship between replacement cost and fair market value.⁵ Actual selling prices, comparable sales, and expert opinion carry more weight. Damaged or obsolete goods are valued in their current condition.

Paperwork That Protects the Deduction

The IRS layers substantiation rules on top of the calculation, and missing a step can wipe out the deduction entirely.

Contemporaneous Written Acknowledgment

Get a written acknowledgment from the charity before you file. It should describe the property and state whether the charity provided any goods or services in return. If it gave nothing back, the acknowledgment should say so.

Form 8283

File Form 8283 with your return whenever total noncash charitable contributions for the year exceed $500.⁶ Inventory uses a special threshold test: compare the charitable deduction claimed against what you would have deducted as COGS if you sold the goods instead. If that difference is over $5,000 per item or group of similar items, complete Section B and get a qualified appraisal. Between $500 and $5,000, Section A is enough.⁷

The IRS instructions give a useful example. Clothing donated from inventory that cost $500 with an $800 charitable deduction produces a $300 difference. That falls below the $500 filing threshold, so Form 8283 is not required at all, even though the deduction itself exceeds $500.⁷

Qualified Appraisal

When Section B applies, the appraisal must be signed and dated by a qualified appraiser no earlier than 60 days before the contribution. The appraiser needs a recognized professional designation or at least two years of experience valuing the specific type of property, must regularly prepare appraisals for compensation, and must follow the Uniform Standards of Professional Appraisal Practice.⁸

Where Each Entity Reports

Sole proprietors make the COGS adjustment on Schedule C, then claim the charitable deduction on Schedule A of the personal return.
C-corporations report the deduction on Form 1120.
Partnerships and S-corporations file Form 8283 with Form 1065 or 1120-S and pass the deduction through on Schedule K-1, where owners claim it on their individual returns.⁷

Recapture if the Charity Disposes of the Property

If you claimed an enhanced deduction that exceeded your basis and the charity sells, exchanges, or otherwise disposes of the property within three years, you must include the excess in income for the year of disposition. The recapture amount is the deduction claimed minus your original basis.² The charity can prevent recapture by certifying the property was used for its exempt purpose or that the intended use became impossible or infeasible. Charities are separately required to file Form 8282 when they dispose of donated property within three years.⁹ Donors who only took a basis-level deduction have nothing to recapture.

Penalties

The IRS generally disallows the deduction outright when a required Form 8283 is missing, required fields are blank, or a required appraisal is skipped. Writing “available upon request” in a required field counts as leaving it blank. Reasonable cause is the one escape, and only if the failure was not willful neglect.⁸

Overvaluing carries a 20% accuracy-related penalty on the resulting underpayment for a substantial valuation misstatement, and 40% for a gross valuation misstatement. Those penalties come on top of the additional tax owed after the deduction is reduced.

Liability Protection for Food Donors

Food donors get a benefit on top of the tax deduction. The Bill Emerson Good Samaritan Food Donation Act shields donors from civil and criminal liability for injuries related to the nature, age, packaging, or condition of donated food when the donation is made in good faith to a nonprofit for distribution to needy individuals.¹⁰ The receiving nonprofit gets the same protection.

The shield does not cover gross negligence or intentional misconduct. Gross negligence under the Act means voluntary and conscious conduct where the person knew harm was likely.¹⁰ Federal law preempts weaker state protections, and states remain free to offer stronger ones.

1
Internal Revenue Service. Publication 526 (2025), Charitable Contributions
2
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
3
Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
4
Internal Revenue Service. Charitable Contribution Deductions
5
Internal Revenue Service. Determining the Value of Donated Property
6
Internal Revenue Service. About Form 8283, Noncash Charitable Contributions
7
Internal Revenue Service. Instructions for Form 8283 (Rev. December 2025)
8
Internal Revenue Service. Instructions for Form 8283
9
Internal Revenue Service. About Form 8282, Donee Information Return
10
GovInfo. Public Law 104-210 – Bill Emerson Good Samaritan Food Donation Act