An inventory donation tax deduction is generally limited to what your business paid for the goods, not what you would have sold them for. A narrower set of donations qualifies for an enhanced deduction that reaches basis plus half the built-in appreciation, capped at twice basis. Which rule applies turns on three things: your business structure, what kind of inventory you gave, and what the charity does with it.
The Default Deduction Is Your Cost, Not Retail
Inventory is ordinary income property. If you sold it, the gain would be ordinary income, not capital gain. The tax code requires you to reduce the fair market value of the donated property by the entire gain you would have recognized on a sale, which almost always leaves you with your cost basis.1Internal Revenue Service. Publication 526 – Charitable Contributions
So if you paid $100 for a product that retails for $300, your deduction under the general rule is $100. The $200 of built-in profit contributes nothing. This baseline governs every inventory donation that doesn’t meet the enhanced deduction requirements, whether the problem is your entity type, the type of inventory, or how the charity uses the goods.
When You Qualify for the Enhanced Deduction
Section 170(e)(3) allows a larger deduction for qualifying inventory contributions, but access depends on what you donate and how you’re taxed.2Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
For non-food inventory, only C corporations can use the enhanced deduction. S corporations, partnerships, sole proprietorships, and LLCs taxed as anything other than a C corporation are stuck with the basis-only rule.
Food is the exception, and it’s a big one. The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extended the enhanced food donation deduction to every business type, including S corporations, partnerships, LLCs, and sole proprietorships.3United States Department of Agriculture. Federal Incentives for Businesses to Donate Food That makes food the only category where a pass-through business can claim more than basis.
Two categories that once qualified no longer do. The enhanced deduction for computer technology donated to K-12 schools was repealed in 2014, and the book inventory provision was struck in 2018.4Office of the Law Revision Counsel. 26 US Code 170 – Charitable, Etc., Contributions and Gifts You can still donate those items and take the basic basis deduction; the enhanced calculation is gone.
Food Inventory Has Extra Conditions
The food must be “apparently wholesome food” — food intended for human consumption that meets all federal, state, and local quality and labeling standards, even if it’s no longer readily marketable due to appearance, age, freshness, grade, size, or surplus.5United States Department of Agriculture. Bill Emerson Good Samaritan Food Donation Act Frequently Asked Questions Food past its sell-by date can qualify if it is still safe and correctly labeled. If the food is regulated under the Federal Food, Drug, and Cosmetic Act, it must comply with that act both on the donation date and for the 180 days before it.2Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
How the Enhanced Amount Is Calculated
When a donation qualifies, the deduction equals your basis plus half the built-in appreciation (fair market value minus basis). The total cannot exceed twice your basis in the property.2Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
An example. A C corporation donates medical supplies with a basis of $1,000 and a fair market value of $3,000. Appreciation is $2,000. Half of that is $1,000. The formula gives $1,000 + $1,000 = $2,000. The twice-basis cap is also $2,000, so the full amount is deductible.
Change the fair market value to $5,000 and the cap starts biting. Appreciation is $4,000, half is $2,000, and the formula produces $3,000. But twice basis is $2,000, so the deduction is capped there. For highly appreciated inventory, the twice-basis ceiling is usually the binding constraint.
What the Charity Must Do With the Inventory
The recipient must be a 501(c)(3) organization and cannot be a private non-operating foundation.6Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations You can confirm status through the IRS Tax Exempt Organization Search.
Beyond status, the property has to pass a use test. The charity must use the inventory solely for the care of the ill, needy, or infants, and the use must relate to its exempt purpose. The charity cannot sell, trade, or otherwise transfer the goods for money, property, or services.2Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts If the recipient resells your donation through a thrift store, you lose the enhanced deduction and drop back to basis.
You also need a written statement from the charity confirming it will use and dispose of the property in line with those restrictions. This statement is separate from the general acknowledgment required for gifts over $250; it specifically addresses how the inventory will be handled.7eCFR. 26 CFR 1.170A-4A – Special Rule for the Deduction of Certain Charitable Contributions of Inventory and Other Property Get it before you file.
Don’t Deduct the Same Cost Twice
Donated inventory that came out of your opening stock has to be removed from that opening inventory. You cannot count the same cost as both cost of goods sold and a charitable contribution.1Internal Revenue Service. Publication 526 – Charitable Contributions
Timing matters in a second way. If you buy inventory and donate it in the same year before it enters opening inventory, the purchase cost is absorbed into cost of goods sold under your normal accounting method. Your basis in that inventory for charitable contribution purposes is zero, and you get no charitable deduction at all.1Internal Revenue Service. Publication 526 – Charitable Contributions Coordinating the donation with your inventory accounting is what preserves the deduction.
Annual Income Caps
The calculated deduction is then subject to percentage-of-income limits.
C Corporations
For tax years beginning in 2026, C corporation charitable deductions are allowed only to the extent total contributions exceed 1% of taxable income, and the deduction still cannot exceed 10% of taxable income.2Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts The first 1% of income worth of contributions produces no deduction. A corporation with $1 million in taxable income that donates $50,000 can deduct $40,000, the range between the $10,000 floor and the $100,000 ceiling. Excess contributions carry forward up to five years.
Individuals and Pass-Throughs
Individuals claiming inventory donations on Schedule A face different caps by recipient type. Noncash contributions of ordinary income property to most public charities are limited to 50% of adjusted gross income; contributions to certain private foundations and other organizations face a 30% ceiling.8Internal Revenue Service. Charitable Contribution Deductions These limits apply to all charitable contributions combined.
The 15% Food Cap
Non-C-corporation taxpayers claiming the enhanced deduction for food inventory face an additional limit: 15% of aggregate net income from all trades or businesses that made the food contributions, figured before any charitable deduction for food inventory.2Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts C corporations face the same 15% cap, measured against taxable income. Amounts over the cap carry forward for up to five years.1Internal Revenue Service. Publication 526 – Charitable Contributions
Documentation, Appraisals, and Forms
Any single contribution of $250 or more requires a written acknowledgment from the charity. You must have it in hand by the earlier of your filing date or the return’s due date including extensions.9Internal Revenue Service. Charitable Organizations – Substantiation and Disclosure Requirements Asking after the fact is too late. The acknowledgment must describe the property and say whether the charity gave you anything in return.
Noncash contributions over $500 require Form 8283. Section A covers gifts between $500 and $5,000. Once your claimed deduction for donated inventory tops $5,000, you must complete Section B and obtain a qualified appraisal.10Internal Revenue Service. Instructions for Form 8283
The qualified appraiser must have relevant coursework and at least two years of experience buying, selling, or valuing the type of property involved. The appraiser cannot be you, the charity, or anyone related to or regularly employed by either of you. The appraisal must be signed and dated no earlier than 60 days before the contribution and no later than the return’s due date including extensions.11eCFR. 26 CFR 1.170A-17 – Qualified Appraisal and Qualified Appraiser Section B of Form 8283 requires both the appraiser’s signature and a signature from an authorized charity representative.12Internal Revenue Service. Form 8283 – Noncash Charitable Contributions Miss either signature and the deduction can be disallowed.
If the charity later sells, exchanges, or otherwise disposes of a Section B item within three years of receipt, it must file Form 8282 with the IRS.13Internal Revenue Service. Form 8282 – Donee Information Return Two exceptions: no filing is required if you certified on Form 8283 that the item was worth $500 or less, or if the charity consumed or distributed the item without charge in carrying out its exempt purpose, which is the expected outcome for most food and medical donations. The IRS uses Form 8282 to catch overvaluation, so a filing that shows a sale price well below your claimed value can prompt a look at your return.
Penalties for Overvaluation
Overstating the value of donated inventory carries consequences beyond losing the deduction. If the value you claim is 150% or more of the correct value, the IRS can impose a 20% accuracy-related penalty on the resulting underpayment. At 200% or more, the penalty doubles to 40%.14Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments These penalties come on top of the extra tax and interest. A well-documented qualified appraisal from an independent appraiser is the strongest defense.
Where the Deduction Goes on Your Return
Individuals claim the deduction on Schedule A of Form 1040. You must itemize to claim any charitable contribution.15Internal Revenue Service. Deducting Charitable Contributions at a Glance
C corporations report the deduction on the charitable contributions line of Form 1120.16Internal Revenue Service. Form 1120 – U.S. Corporation Income Tax Return S corporations and partnerships report the contribution on Form 1120-S or Form 1065, and the deduction flows through to each owner’s return on Schedule K-1.
Attach the completed Form 8283 to whichever return claims the deduction. Keep the full appraisal report in your own files; the IRS can request it during an examination, but you don’t submit it with the return.