Many businesses own excess inventory which takes up warehouse space, requires safeguarding, and involves continuing accounting records. Although no tax deduction is generally allowable for such inventory unless it is actually sold or discarded, the Treasury Regulations permit taxpayers to value goods at bona fide selling prices, less direct cost of disposition for finished goods in an inventory "which are unsalable at normal prices or unusable in the normal way because of damages, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including secondhand

goods taken in exchange." For this purpose, "bona fide selling price" means an actual offering of goods during the period ending not later than 30 days after the yearend. Since many taxpayers cannot satisfy these requirements, they are not able to take advantage of a tax deduction under these rules.

In appropriate situations, a tax deduction can be obtained through a charitable contribution of inventory items. Regular [C] corporations (but not S corporations) can obtain a favorable tax deduction for inventory items without meeting the stringent requirements noted above by donating their excess inventory to a public charity. As explained below, this deduction can exceed the cost basis of the donated goods. S corporations and other entities may only deduct the cost basis of inventory items given to charity.

Section 170(e)(1) of the Internal Revenue Code provides a general rule that the amount of a charitable deduction for contributions of ordinary income property (e.g. inventory) is limited to its cost basis. However, Section 170(e)(3) provides an exception for a "qualified contribution" of inventory to a public charity if the following four conditions are satisfied:

1. The use of the property by the charity is related to the charity's purpose or function and the property is to be used by the charity solely for the care of the ill, the needy, or infants;

2. The property is not transferred by the charity for money, other property, or services;

3. The donor-corporation receives from the charity a written statement representing that its use and disposition of the property will conform to (1) and (2) above; and

4. If the property is subject to regulation under the Federal Food, Drug and Cosmetic Act, the property must satisfy the applicable FDA requirements on the date of the transfer and 180 days prior thereto.

In addition, the donor-corporation should attach a Form 8283 (Noncash Charitable Contributions) to its tax return. In the case of a qualified contribution, the portion of this form requiting a qualified appraisal applies only when the fair market value of the donated inventory exceeds its cost basis by more than $5,000.