At some point, most sellers end up with inventory that just isn't moving — damaged items, products that went out of season, things that simply won't sell at any price. And the question that comes up again and again is: Should I donate it? Isn't that a tax write-off?

The answer is more nuanced than most people expect. As Chris Potter, Co-Founder of Tall Oak Advisors, put it: "There's less savings than you'd think."

Your Three Options for Dead Inventory

When you've got unsellable inventory, you essentially have three paths:

1. Liquidate — sell it at a reduced price through liquidators, clearance channels, or platforms like eBay

2. Destroy — dispose of it and record the loss

3. Donate — give it to a charity, church, Goodwill, or similar organization

Each one has different tax implications. Today, let's focus on the donation route — because it's the most commonly misunderstood.

The Common Misconception About Donating Inventory

Many sellers assume that donating dead inventory to Goodwill or a local charity guarantees a full tax deduction equal to what they originally paid. For most eCommerce sellers — particularly those operating as LLCs, sole proprietors, or S-Corps — that's not how it works.

For these business structures, donations are deducted on your personal tax return, not your business one. And to actually benefit from that personal deduction, your total itemized deductions need to exceed the standard deduction threshold.

For 2025, the standard deduction amounts are:

To benefit from your charitable donation on your personal return, your total itemized deductions need to exceed whichever of these amounts applies to you.

Here's what counts toward itemized deductions:

• Mortgage interest

• Property taxes

• Medical expenses (only the portion above 7.5% of your income)

• Charitable donations

• A handful of other specific items

The challenge: most people don't reach that threshold. Which means the donation deduction often provides zero additional tax benefit — even though the charitable intent is real.

A Real Example That Shows the Math

Let's say you're married filing jointly and you donate $4,000 worth of dead inventory. You'd need more than $31,500 in other qualifying deductions — mortgage interest, property taxes, medical expenses, etc. — before that $4,000 donation adds anything to your tax savings at all.

If your other deductions don't get you there, that $4,000 donation gives you $0 in additional deductions.

Now consider the alternative: you sell that same inventory to a liquidator for $500. That $500 is income, yes — but the original $4,000 cost flows through as Cost of Goods Sold. Your net deduction is $3,500.

Selling at a steep discount often produces a better tax outcome than donating outright.

How It Actually Flows Through Your Books

Understanding the accounting mechanics helps clarify why timing matters. Let's use a $10 item as the example.

The IRS formula for COGS is:

Beginning Inventory + Purchases − Ending Inventory = COGS

If You Donated or Disposed of It Before December 31

The item is gone from your inventory at year-end:

$0 + $10 − $0 = $10 COGS

The cost flows through. But what you record in addition to that inventory entry depends on what happened to it.

If You Still Have It on December 31

The item is still yours at year-end, even if you plan to donate it soon:

$0 + $10 − $10 = $0 COGS

No deduction this year. It carries into next year when you actually dispose of it.

Two Different Entries for Two Different Situations

Once the item leaves your possession, how you record it matters.

If you threw it away or destroyed it — this is an Inventory Loss / Disposal, recorded as a business expense. The full cost is deductible as a business loss because the item had no remaining value and generated nothing in return.

If you donated it (LLC, sole prop, or S-Corp) — this is recorded as Cost of Inventory Removed for Personal Use, not as a business loss. The reason: as a pass-through entity, you and your business share a legal identity, so the donation is considered a personal act. The item leaves your business inventory, but the deduction moves to your personal return — where it only helps if you're itemizing.

In QuickBooks, both of these have dedicated categories. Recording them correctly keeps your Profit & Loss accurate and your books clean for tax time.

The C-Corp Exception

If your business is a C-Corporation, the rules are more favorable. C-Corps may qualify for an enhanced charitable deduction under IRC Section 170(e)(3) — potentially deducting more than just the cost basis of donated inventory. If that's your structure, work with your accountant on the right entry.

So Should You Donate?

Donating unsellable inventory is a genuinely good thing to do. If you're motivated by wanting to help — a food bank, a local shelter, a church — absolutely go for it.

Just don't make the tax benefit your primary reason. As Chris Potter put it: "If you're driven by goodwill, go for it. Just know that tax benefits shouldn't be your primary motive."

From a pure tax standpoint, liquidating at a low price — even $1 — often produces a more favorable outcome than donating. The COGS deduction is direct and doesn't depend on whether you can itemize.

Quick Reference Summary

Have questions about how your inventory is flowing through your books? At Tall Oak Advisors, we specialize in supporting eCommerce sellers— and situations like this come up all the time. We'll help you make sure your inventory treatment is set up correctly before tax season. Schedule a free consultation.

This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently and individual circumstances vary. Always consult a qualified tax professional before making decisions about your specific situation.