How do I account for the donation of inventory by my business?
If your donation is not going to a registered charity (eg a local fundraiser or special event), the only entry you need is to move the COST value of the items from inventory to either a “donations” or “advertising and promotions” account. This is when you will not be receiving an official donation receipt from the recipient.
If your donation is going to a registered charirty who are issuing an official donation receipt, there are two things to consider when you are donating inventory:
1. Fair market value of the donated inventory
Your business would record a sale equal to the fair market value of the inventory. By “fair market value” we mean the value of the sale if you had sold it to a customer.
No GST/HST would be recorded as collected or collectable on this sale.
The accounting journal entry would be:
2. Cost of the donated inventory
The cost of the inventory donated would be removed from the inventory asset account and added to the cost of goods sold account.
Dr. Cost of goods sold
A. A donation of service does not qualify for a charitable donation receipt. However, if you provide a service to a charity and bill the charity for these services, then you may donate the payment the charity makes back to the charity to receive a donation receipt.
Example: Stan the Painter offers to paint the local drop-in centre. The fair market value of his work is $500. As this is a service, the work is not eligible for a donation receipt. However, he could bill the drop-in centre for the amount, which they would pay. Stan then donates the $500 to the drop-in centre. This donation becomes eligible for a donation receipt.
B. Charitable donations cannot exceed 75% of the businesses’ taxable income. An incorporated business receives a deduction for the full value of the donation. An unincorporated business earns a 15% tax credit for donations up to $200 and a 29% tax credit on donations in excess of $200. The unincorporated business’ tax credits are the same as the tax credits that an individual would receive. This is because an unincorporated business and the owner(s) of the unincorporated business are not separate taxpayers.
For more information please refer to:
IT-297 R2 – Gifts in Kind to Charity and Others
Policy commentary CPC-017