Donating Inventory to Charity: Deduction Rules and 2026 Floor

A business that gives away inventory to a qualified charity can generally claim a tax deduction equal to its cost basis in the goods. C-corporations and food donors may qualify for a larger “enhanced” deduction. The size of the write-off when donating inventory to charity for a tax deduction depends on your entity type, what you donate, how the charity uses it, and whether you handle the cost-of-goods-sold adjustment and paperwork correctly.

Who Can Donate and Who Can Receive

Any business that holds property for sale can donate inventory and claim a deduction: sole proprietorships, partnerships, LLCs, S-corporations, and C-corporations. Finished goods, raw materials, and work-in-process all qualify, as long as they are inventory under your accounting method.

The recipient must be a tax-exempt organization described in Section 501(c)(3), which covers most public charities, religious organizations, and schools.¹ Private foundations generally do not qualify as recipients for inventory donations that get favorable treatment, with operating foundations as an exception.

For the ordinary deduction, the charity must put the donated goods to a use related to its exempt purpose. If the charity simply resells the inventory, your deduction drops to the lower of your cost basis or the property’s fair market value. The enhanced deduction has stricter conditions, discussed below.

The Standard Deduction: Your Cost Basis

For individuals, sole proprietorships, partnerships, and S-corporations, the deduction equals the smaller of fair market value on the date of donation or your basis in the property.² Because inventory is ordinary income property, this formula effectively limits you to cost basis whenever fair market value is higher.

Then comes the COGS adjustment, which trips people up. If the donated inventory was in your opening inventory for the year, you remove the charitable deduction amount from opening inventory. You do not also deduct it through cost of goods sold. The principle is simple: you cannot take the same cost twice, once as COGS and again as a charitable contribution.²

There is a trap for businesses that buy goods specifically to donate them. If you purchase inventory and donate it in the same year, and that cost was never part of opening inventory, your basis for charitable deduction purposes is zero. The purchase price flows through COGS under your normal method, but you get no separate charitable deduction on top.²

A Quick Example

Say inventory cost $8,000 and has a current fair market value of $12,000. The deduction is limited to the $8,000 basis. You then remove that $8,000 from opening inventory so it does not also run through cost of goods sold.

When the Goods Have Lost Value

If inventory is damaged, obsolete, or past its peak and fair market value is now below your cost, the deduction is limited to that lower fair market value. You cannot deduct the gap between what you paid and what the goods are worth today.² This matters because distressed inventory is exactly the kind businesses most often donate.

The Enhanced Deduction for C-Corporations

A C-corporation that donates inventory the charity will use for the care of the ill, the needy, or infants, or for qualified scientific research, can deduct more than cost basis. The formula is basis plus half of the unrealized appreciation (fair market value minus basis), capped at twice basis.³

Working the math: inventory with a $10,000 basis and $25,000 fair market value has $15,000 of appreciation. Half is $7,500. Add the $10,000 basis and the deduction is $17,500, which is under the $20,000 cap (twice basis). Push the fair market value to $35,000, and the formula gives $22,500, which the $20,000 cap trims back.

The charity cannot sell or exchange the property, and it must give you a written statement confirming the goods will be used for qualifying purposes and will not be transferred for money or other consideration. If the charity later violates those terms, recapture rules kick in.

Timing for Accrual-Basis Corporations

An accrual-basis C-corporation can treat a contribution as made in the current tax year even if delivery happens after year-end, provided the board authorized the gift during the year and the property is delivered by the 15th day of the fourth month after year-end.³ The corporation elects this treatment on the return. For a calendar-year filer, the delivery deadline is April 15 of the following year.

The Enhanced Deduction for Food Inventory

A parallel enhanced deduction is open to all business taxpayers, not just C-corporations, for donations of “apparently wholesome food.” That means food fit for human consumption that meets quality and labeling standards, even if it is no longer readily marketable because of appearance, freshness, grade, or surplus.³

The formula matches the C-corporation version: basis plus half the appreciation, capped at twice basis. The food must go to a charity that uses it for the care of the ill, the needy, or infants. There is also an overall ceiling for food contributions: the total food-inventory deduction cannot exceed 15% of aggregate net income from the businesses that made the contributions, or 15% of taxable income for a C-corporation.³

How to Value Donated Inventory

Fair market value is the price a willing buyer and willing seller would agree on, with neither under pressure and both reasonably informed.⁴ For inventory, that is not the retail sticker price. The IRS looks at what similar quantities actually sell for in the appropriate market. A truckload of clothing donated to a shelter will likely be valued at wholesale, not single-unit retail.

Replacement cost is generally not reliable. The IRS says there is usually no direct relationship between what it would cost to buy identical goods today and fair market value.⁴ The relevant factors are the actual cost or selling price, comparable sales, and expert opinions. Damaged or obsolete goods are valued in their current condition, not new.

Annual Limits, Carryforward, and the 2026 Corporate Floor

The calculated deduction still runs through annual caps.

Pass-Through Entities and Individuals

Noncash contributions of ordinary income property to a public charity are limited to 50% of adjusted gross income.² The 60% figure applies only to cash. Contributions to certain private foundations face a 30% cap.⁵ Anything above the cap carries forward up to five years.³

C-Corporations and the New 1% Floor

C-corporations have their own 10% of taxable income cap on total charitable deductions, with the same five-year carryforward for excess.

For tax years beginning after December 31, 2025, the One Big Beautiful Bill Act (P.L. 119-21) added a 1% floor. Only charitable contributions above 1% of taxable income are deductible, up to the 10% ceiling.³ If a corporation has $1 million of taxable income and donates $50,000 of inventory, the first $10,000 generates no deduction and the remaining $40,000 is deductible. Corporations with modest giving relative to income will feel this.

Recapture if the Charity Disposes of the Property

If you claimed an enhanced deduction (one that exceeded your basis) and the charity sells, exchanges, or otherwise disposes of the property within three years, you include the excess in income for the year of disposition. The recapture amount is the deduction you claimed minus your original basis.³

The charity can avoid triggering recapture by certifying that the property was used for its exempt purpose, or that the intended use became impossible or infeasible. Separately, the charity must file Form 8282 with the IRS if it disposes of donated property within three years.⁶ Donors who only took the standard basis-level deduction have no excess to recapture.

Reporting and Substantiation

Paperwork errors are one of the fastest ways to lose the deduction. Requirements scale with the size of the gift.

Written Acknowledgment

For any donation, get a contemporaneous written acknowledgment from the charity before filing. It should describe the property and state whether the charity provided any goods or services in return. If nothing was provided in return, the acknowledgment should say so.

Form 8283

If total noncash contributions for the year exceed $500, you must file Form 8283 with your return.⁷ Inventory has a special rule for choosing which section to complete. Compare the charitable deduction claimed against what you would have deducted as cost of goods sold had you sold the inventory instead. If the difference exceeds $5,000 per item or group of similar items, you complete Section B, which requires a qualified appraisal. If the difference is $5,000 or less but above $500, Section A is enough.⁸

Qualified Appraisals

When Section B applies, the appraiser must sign and date the appraisal no earlier than 60 days before the contribution date. The appraiser must hold a recognized designation from a professional appraisal organization or have at least two years of experience valuing the specific type of property, and must regularly prepare appraisals for compensation. The appraisal must follow the Uniform Standards of Professional Appraisal Practice.⁹

Where to Report by Entity Type

Sole proprietors make the COGS adjustment on Schedule C and 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 to owners on Schedule K-1, who claim it on their individual returns.⁸

Penalties for Getting It Wrong

The IRS will generally disallow the deduction entirely if you fail to attach a required Form 8283, leave required fields blank, or skip a required appraisal. Writing “available upon request” in a required field is treated as blank. The one escape is reasonable cause not amounting to willful neglect, which may let the deduction survive.⁹

Overvaluation has its own penalty. A substantial valuation misstatement triggers a 20% accuracy-related penalty on the underpayment. A gross valuation misstatement doubles that to 40%. These apply on top of the additional tax owed once the deduction is reduced or denied.

Liability Protection for Food Donors

Businesses donating food inventory get a benefit beyond 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, as long as 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 has limits. It does not cover gross negligence or intentional misconduct. Gross negligence under the Act means voluntary and conscious conduct the person knew was likely to be harmful.¹⁰ The federal law preempts weaker state laws, but states can go further. For businesses hesitant to donate perishable inventory because of liability worries, the Act removes most of that risk.

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