To account for a product given away, debit the expense account that matches your reason for the giveaway and credit inventory, both at your original cost. Promotional handouts hit advertising or marketing expense. Gifts to a specific client or contact hit a business gifts account, subject to a $25-per-recipient annual deduction cap. Donations to qualified nonprofits hit charitable contributions. The dollar amount on both sides of the entry is what you paid for the item, including any sales tax or shipping you paid to acquire it, not the retail price.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
Pull Your Records Before You Post
The entry is short. The paperwork behind it is what protects you. For every giveaway, capture the item or SKU, the quantity removed, the per-unit cost at purchase, the date, and the reason. Your inventory log holds the numbers. A transfer memo or internal requisition, signed by whoever authorized the removal, holds the reason.
Missing inventory that you cannot explain is a problem. If the gap has no documented cause, the IRS can treat it as unreported sales.2Internal Revenue Service. IRM 4.10.4 Examination of Income Accuracy-related penalties run 20% of the underpayment for negligence or substantial understatement,3Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments and rise to 75% if the IRS finds fraud.4Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty A signed memo in an organized folder costs almost nothing and closes that door.
Promotional Giveaways
When you distribute product at a trade show, mail samples, or hand out items at a community event, you are converting inventory into advertising. Debit advertising or promotional expense for the total cost basis. Credit inventory for the same amount.
Twenty units at $5 each becomes a $100 debit to advertising expense and a $100 credit to inventory. Note the event name and date in the memo. Broad promotional distribution qualifies as an ordinary and necessary business expense under federal tax law.5Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses The treatment holds as long as you are distributing to the general public or a wide audience rather than singling out a specific recipient. Targeted gifts follow a different rule.
Business Gifts to a Specific Person
Give a product to a named client, vendor, or referral partner and it is a business gift, not a promotion. Your deduction is capped at $25 per recipient per year.6Internal Revenue Service. Income and Expenses 8 The journal entry still moves the full cost out of inventory, but only $25 of it is deductible. Give a client a product that cost you $80 and the entry is an $80 credit to inventory, a $25 debit to a deductible gift expense, and $55 to a non-deductible expense account.
Two exceptions matter. Items costing $4 or less with your business name permanently imprinted, distributed regularly, do not count toward the $25 limit at all.7eCFR. 26 CFR 1.274-3 – Disallowance of Deduction for Gifts Branded pens, keychains, and koozies fall here. Incidental costs like engraving, packing, or shipping also stay outside the cap, provided they do not add substantial value. A husband and wife share a single $25 limit per recipient.
Log the recipient’s name and the business purpose. If an item could be classified as either a gift or entertainment, the IRS generally treats it as entertainment, which is not deductible.
Charitable Donations
Donating product to a qualified nonprofit uses the same structure with a different account. Debit charitable contributions for the cost basis. Credit inventory for the same amount. Keeping charitable contributions in their own account, separate from advertising and general expenses, makes year-end reporting cleaner and helps you track deduction limits.
The deduction generally equals your cost basis, not retail value. Paid $3 per unit for 100 units, donated all of them, deduction is $300.8Internal Revenue Service. Charitable Contribution Deductions The memo should include the receiving organization, the date, and a description of what was donated.
Enhanced Deductions for Certain Inventory
C corporations can sometimes deduct more than cost basis when donating inventory used for the care of the ill, the needy, or infants. The donation must go to a qualifying 501(c)(3) that will use it directly for that purpose and will not resell it. When those conditions are met, the deduction can reach cost basis plus half of the appreciation, capped at twice the cost basis.9Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts
Food donations reach further. Any business, not only C corporations, can use the enhanced deduction when donating apparently wholesome food from its trade or business. The annual total is capped at 15% of aggregate net income from the trades or businesses that made the contributions.9Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts Restaurants, grocers, and food manufacturers with product approaching sell-by dates should look at this closely.
The 2026 Corporate Rules
Starting in 2026, C corporations can deduct charitable contributions only to the extent they exceed 1% of taxable income, and the deduction still cannot exceed 10% of taxable income.9Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts A corporation with $500,000 in taxable income that donates $8,000 of inventory deducts only the amount above $5,000 (1% of $500,000), for a $3,000 deduction. Amounts above the 10% ceiling can be carried forward.
Sole proprietors, partnerships, and S corporations are not subject to this corporate floor. Partnerships and S corporations pass charitable contributions through to partners or shareholders on Schedule K-1, where individual limits apply on the personal return.10Internal Revenue Service. Instructions for Form 1065 (2025)
IRS Documentation for Donated Inventory
A receipt from the charity is not optional. For noncash contributions under $250, you need a receipt showing the organization’s name and address, the donation date, and a description detailed enough for someone unfamiliar with the items to understand what was given.11Internal Revenue Service. Publication 526 (2025), Charitable Contributions Copy those details into the journal entry description so the books and the IRS documentation match.
At $250 or more, you need a contemporaneous written acknowledgment from the charity that describes the property and states whether the organization gave you anything in return, with a good-faith estimate of value if it did. Contemporaneous means you hold the acknowledgment no later than the date you file your return for the donation year.12Internal Revenue Service. Substantiating Charitable Contributions
When total noncash contributions for the year exceed $500, attach Form 8283 to your return. Donated inventory is reported in Section A even when the deduction exceeds $5,000, an exception to the general rule that would otherwise require Section B and a qualified appraisal.13Internal Revenue Service. Instructions for Form 8283 (Rev. December 2025) The inventory exception saves an appraisal fee, but the form still has to be filled out accurately and the charity’s acknowledgment kept with it.
Do Not Deduct the Same Cost Twice
This is where most donated-inventory accounting goes wrong. When you post the charitable contribution entry, you have already moved the cost of the goods out of inventory into a deduction. If those same items also remain in your cost of goods sold calculation, you have deducted the same dollars twice. The IRS requires you to remove the cost basis of donated inventory from opening inventory so it does not reduce gross income through COGS on top of the charitable deduction.14Internal Revenue Service. Tax Guide for Small Business
If $400 of donated product was in last year’s closing inventory, subtract that $400 from this year’s opening inventory. Your COGS calculation then starts from the correct base, and the $400 flows through only once, as a charitable contribution. The same principle applies to promotional giveaways posted as advertising expense: the inventory credit removes those items from stock, so they should not also appear in your COGS calculation on the return.
Use Tax on Inventory Pulled From Resale Stock
If you bought inventory tax-free with a resale certificate and then gave it away instead of selling it, most states treat you as the end consumer and charge use tax on the cost. The rate usually matches your state and local sales tax rate, and you self-assess it on your regular sales tax return.
Several states exempt inventory donated to qualified nonprofits from use tax, provided the goods were originally purchased for resale and held only for sale before donation. The rules vary, so check your state’s department of revenue guidance before relying on the exemption. When use tax does apply, record it as an additional expense, separate from the product cost.
Reconcile the Count and File
After posting every giveaway entry, run a physical inventory count and compare it to your accounting software. Any gap between shelves and books points to a missed entry, shrinkage, or a bad giveaway posting. Resolve those before filing, because the numbers on your return flow straight from these balances.
Sole proprietors and single-member LLCs report the adjusted inventory and expense figures on Schedule C of Form 1040.15Internal Revenue Service. Instructions for Schedule C (Form 1040) (2025) C corporations file Form 1120 and report charitable contributions on Line 19.16Internal Revenue Service. Instructions for Form 1120 (2025) Partnerships file Form 1065 and pass charitable contributions through on Schedule K-1.10Internal Revenue Service. Instructions for Form 1065 (2025) Whatever the structure, the charitable contribution and advertising totals on the return should match the journal entries in the books, and the signed transfer memos and charity acknowledgments should sit in the file for at least three years after filing.