How to record donation of inventory?

Recording a donation of inventory means removing the goods from your books at cost and recognizing a charitable contribution expense, while separately documenting fair market value for your tax deduction. The bookkeeping entry and the tax deduction calculation are two different things, and mixing them up is the most common mistake businesses make.

The basic journal entry

For most businesses, inventory is carried on the books at cost, not fair market value. When you donate it:

Debit charitable contribution (or donation) expense at the inventory's cost basis
Credit inventory for the same amount

If the donated goods cost you $10,000 to produce or acquire, you debit contribution expense $10,000 and credit inventory $10,000. That removes the goods from your balance sheet and records the donation as an expense on your income statement. The tax deduction you actually claim may differ from this book entry, especially for C corporations claiming an enhanced deduction under Internal Revenue Code Section 170(e)(3) for inventory donated to charities serving the ill, needy, or infants. In that case, the deduction can exceed cost basis (generally cost plus half the appreciation, capped at twice cost), but that extra benefit is a tax adjustment, not a change to your book entry.

Documenting fair market value

Even though the accounting entry uses cost, your tax deduction depends on fair market value, so you need support for that number separate from your general ledger. Stock-in-trade and inventory held for sale to customers are generally exempt from the qualified appraisal requirement that applies to other noncash property, but you still need clear documentation of how you determined FMV, particularly for large or specialized inventories where retail pricing alone doesn't tell the full story.

A professional inventory appraisal establishes a defensible fair market value using recognized methodology, prepared in accordance with USPAP, which is useful documentation to keep alongside your books whenever the donated inventory's value is significant or its condition and marketability aren't straightforward. For questions on valuing inventory correctly before you record the transaction, see our guidance on what does GAAP require of inventory valuation.