Tax season tip #1: donate unsold inventory
January 05, 2016

As 2015 comes to a close, businesses may find themselves with leftover product that cannot be sold. This inventory takes up valuable storage space for new or high-selling items. One option for making use of such unsellable overstock is for businesses to donate the inventory and deduct the value on their tax returns.

Eligible charities
The first thing to know is that not all charities are eligible for tax-exempt donations. The Exempt Organizations Select Check is a handy tool provided by the IRS to see if a certain charity qualifies. Business can also call the IRS or contact charity leaders directly and request to see their determination letter. Note that donations must be made to the organization itself and not to individuals within it. Gifts to individuals are not tax deductible.

The fair market value
Small business accountants should use the fair market value of the inventory to determine the amount of the deductible. The IRS defines fair market value as the price that the inventory would currently sell for - a price agreed upon by a willing buyer and a willing seller and reflecting any and all restrictions. There is no one set formula to calculate value lost or added over time, so accountants should consider the price of similar products, the date and market conditions of the initial sale, the price of the item during its initial sale, the cost of a replacement and experts' opinions.

A qualified appraiser must complete an appraisal if the claimed deduction for an item or collection of related items is greater than $5,000. There are some exceptions, such as nonpublicly traded stock worth $10,000 or less or patents and other intellectual property. It's also important to note certain articles of clothing or household items where the deduction is over $500 must also be appraised. Once the appraisal is complete, attach Section B of Form 8283 to the tax return. Businesses should keep the appraisal for future financial reporting unless the claimed deduction is more than $500,000. In this case, both the appraisal and Section B of Form 8283 must be attached to the return.

The IRS website lists detailed instructions on finding charitable donations, calculating an item's fair market value and determining the need for an appraisal. Businesses can carry over the giving spirit of the holidays by donating excess inventory to charities and claiming the donations on their taxes.

Nexus: G-WEBCD1