- Posted onAugust 25, 2025
- By Jessica I. Marschall, CPA, ISA AM, President & CEO TGMI, GM-ESG, Probity Appraisal Group and MAS LLC
For corporations, donating property to charity can be more than an act of goodwill, it can also generate meaningful tax savings. Yet not all property is treated the same under the Internal Revenue Code. Some assets qualify for a deduction at their full fair market value (FMV), while others are limited to the company’s basis. Knowing these rules is critical for tax planning, compliance, and maximizing the benefit of charitable giving.
Below is a breakdown of the major categories of corporate property and how the rules apply when these assets are donated.
Inventory is property a business holds for sale to customers — think retail goods, raw materials, or finished products.
- Deduction Rule: Normally, the charitable deduction is capped at the corporation’s adjusted basis (usually cost), not FMV. That means you do not get to deduct the profit margin you might have earned if you sold the goods.
- Exceptions: Congress has carved out enhanced deductions for certain industries. For example, contributions of food inventory, books, or computers to schools or qualified nonprofits may qualify for a deduction equal to basis plus 50% of the appreciation, capped at twice the basis (IRC §170(e)(3)). And note that an appraisal is not required for these donations, however clean accounting records of original basis are a must. Our firm often engages to help substantiate these donations through accounting records.
- Example: A grocery chain donates unsold food inventory with a basis of $10,000 and FMV of $16,000. Deduction is capped at $15,000 (basis plus half of the $6,000 appreciation).
👉 Commentary: This rule encourages companies to give away items like food or educational supplies, where donations clearly advance a charitable purpose and reduce waste, but it prevents corporations from turning normal inventory into a “capital gain–like” deduction.
This category includes tangible personal property subject to depreciation, such as machinery, equipment, vehicles, and certain intangibles.
- Deduction Rule: For §1245 property, most of the gain on sale would be taxed as ordinary income due to depreciation recapture. Because of this, the charitable deduction is generally limited to basis.
- Example: A manufacturer donates a machine with basis $5,000 and FMV $20,000. The deduction is limited to $5,000.
👉 Commentary: Corporations often hope to donate old equipment at FMV, but the IRS prevents this — recognizing that much of the appreciation is “phantom” created by past depreciation deductions.
Section 1250 property includes depreciable real estate such as buildings and their structural components. Land is not depreciable, so it is not covered by §1250.
- Deduction Rule: If held longer than one year, corporations can generally deduct the FMV of §1250 property when donated, as long as the charity uses the property for a related exempt purpose.
- Recapture: Depreciation recapture under §1250 does not reduce the charitable deduction.
- Unrelated Use: If the property is donated to a charity that does not use it directly (e.g., the charity sells it immediately), the deduction may be limited to basis.
- Example: A corporation donates a warehouse with FMV $1,000,000, basis $500,000, and $200,000 in accumulated depreciation. Deduction = $1,000,000 if used for charitable purposes.
👉 Commentary: Real estate is one of the most tax-efficient assets for corporate philanthropy. Unlike machinery, the recapture rules don’t claw back depreciation when donating, so the company often gets a deduction at full FMV.
Capital assets include stocks, bonds, works of art, and other property not used in the ordinary course of business.
- Deduction Rule: If the asset is held for more than one year, the deduction is usually the FMV.
- Special Limitation: If the property’s use is unrelated to the charity’s mission, the deduction is limited to basis.
- Example: A corporation donates stock with basis $50,000 and FMV $100,000 to a university endowment. Deduction = $100,000.
👉 Commentary: This rule is why you often see corporations donating appreciated securities — they avoid recognizing the gain and still get a deduction at FMV. It’s a double benefit.
Corporations may also donate intellectual property.
- Deduction Rule: Deduction is limited to basis, with a possible additional deduction based on future income the charity earns from the IP (IRC §170(m)).
- Example: A corporation donates a patent with basis $25,000 and FMV $500,000. Initial deduction = $25,000. If the charity later earns royalties from the patent, the corporation may claim additional deductions.
👉 Commentary: Congress restricted FMV deductions for intellectual property after abuses in the 1990s. Now, deductions are tied more closely to the actual economic value realized by the charity.
Summary of Deduction Rules
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Asset Type
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Deduction Amount
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Notes
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Inventory
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Inventory Basis (enhanced deduction possible)
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Encourages donation of food, books, computers
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Depreciable Personal Property (§1245)
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Basis
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Recapture rules limit deduction
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Depreciable Real Property (§1250)
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FMV (if held >1 yr & related use)
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No recapture clawback
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Capital Assets
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FMV (if long-term)
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Basis if unrelated use
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Intangibles
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Basis + contingent future deductions
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Additional deductions if charity earns income
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Conclusion
Corporate charitable giving does not have to be limited to cash. By strategically donating non-cash assets, businesses can reduce tax liability, clear unneeded property from their books, and contribute to meaningful causes. The tax treatment, however, depends squarely on the type of property: inventory and machinery are limited to basis, while real estate and capital assets often qualify for FMV deductions. Intangibles have their own hybrid rules tied to future income.
👉 Bottom line: If a corporation is considering a significant non-cash charitable contribution, it should carefully evaluate the asset class, the holding period, and how the charity intends to use the property. Getting this right ensures that the deduction is maximized while staying compliant with IRS rules.
