Stay in business long enough, and eventually someone will walk into your store or call you asking if your business would be willing to help support a charity. Many businesses gain a great deal of community goodwill through being seen to support charities -- and the charity and community benefits as well. However, there are certain tax considerations you must bear in mind when you donate business assets to charitable causes.
Generally, your business is not ordinarily taxed on donations to charity. However, before you claim a tax deduction, you must also ensure that the organization you are planning to give to is a qualified tax-exempt organization. Fortunately, this is easily done, since the Internal Revenue Service maintains a list of qualified tax-exempt organizations.
To claim a deduction for donated inventory -- defined as products you sell in the ordinary course of your business for income -- you must first have done an opening inventory and accounted for your cost basis in the inventory. Your cost basis is the amount your business paid to manufacture or acquire your inventory. If you have not done an inventory that includes your tax basis, then the IRS will deem you to have a tax basis of zero in your inventory, and you will be prohibited from claiming a charitable deduction.
Claiming the Deduction
The IRS allows owners of S corporations to deduct either the fair market value of the inventory donated -- meaning the amount they could reasonably expect to receive from selling the inventory on the open market to an informed buyer at arms' length -- or their tax basis in the donated inventory, whichever is less. This is why you cannot claim a deduction if your tax basis in the inventory is zero.
Donating Food Inventory
The IRS restricts the donation of food inventory to organizations that will use the food to feed the ill, needy or infants, and then only in accordance with the charity's charter. The food must also conform to FDA regulations and be "apparently wholesome," though the IRS allows donations of safe food that is ordinarily unmarketable, due to appearance or other non-food-safety regulations. For additional information on food donation requirements and restrictions, and for a worksheet that will assist you in calculating your allowable deduction, see IRS Publication 526, Charitable Donations.
Claiming the Deduction
Since S corporations are "pass-through" entities, the deduction for the charitable contributions of S corporations also passes through to the personal income tax returns of the S corporations ownership. Each shareholder can then claim a pro rata share of the corporation's charitable donations on their personal income tax returns, as an itemized deduction on Schedule A. This is disadvantageous, because these deductions, combined with other miscellaneous deductions, must exceed a threshold of 2 percent of the shareholder's annual income in order to be deductible.
- Internal Revenue Service: Publication 334 - Tax Guide for Small Businesses
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.